Start the conversation
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
The gold/silver ratio is yet another indication that silver is grossly underpriced.
Simply put, the gold/silver ratio is the price of gold divided by the price of silver.
It is the "oldest continuously observed exchange rate in the world," according to Shayne McGuire, an emerging markets equities and gold fund manager for Teacher Retirement System of Texas and author of The Silver Bull Market: Investing in the Other Gold.
McGuire also points out in his book that the gold/silver ratio is historically out of balance. For thousands of years the ratio of gold's value to silver's value was about 14 to 1.
And from 1833 to 1876, that ratio was below 16-to-1. This was before it took off, never to return to those levels again until 1979. And even that was a special case, when the Hunt family famously cornered the market and manipulated prices up.
Charts of the gold price history and silver price history show just how much this ratio has changed.
Coming into the 20th century, the steady gold/silver ratio started to become more volatile. It strayed far from the 14-to-1 historical standard. It was as high at 98-to-1 in 1939. It hasn't hit that peak since.
But it's still unjustifiably high.
By 2014 average prices, the gold/silver ratio was 66-to-1. That number has only climbed in 2015. As of yesterday's closing spot gold price and spot silver price, the ratio was about 72-to-1.
"Odds are it's topping out, or about to do so soon. That means the gold/silver ratio will likely revert to its longer-term average and start trending back down," Money Morning Resource Specialist Peter Krauth said.
It's not just that the gold/silver ratio is more than five times its historical average that indicates silver is underpriced.
It's also its scarcity in relation to gold.
Here's what that says about the price of silver today…
What the Gold/Silver Ratio Shows Us About Silver's Value
According to Goldcorp Inc. (NYSE: GG), there is one gram of silver for every 12.5 metric tons of earth.
And there's one gram of gold for every 250 metric tons.
Just by those measures, the true ratio of gold prices to silver prices should be 20-to-1.
That means that at yesterday's spot closing price of $1,214 an ounce, silver prices should be at $60.70 an ounce to align with that ratio. That's 264% above the current price of silver at $16.965 an ounce.
Very interesting article, but I cannot get my head round two fundamental assumptions made:
a) why on earth should the g/s ratio have some unexplained force pulling it back to a historical "standard" level of 14/1? I could understand a pull back to a long term moving average which would obviously be much higher by now but most pundit websites seem coy about offering a 50 year MA as an option. Not sure why??
b) Even if I accept a pullback is likely, to say 50/1 who made the assumption that gold is fairly priced and that it is not gold being OVER priced rather than silver UNDER priced which has caused the ratio to drift up?
I was always taught that if you make assumptions you should clearly state them with a rationale as to why they may be valid.
Any thaughts from the author?
Hello, sorry for the delay in my response on this one.
As far as the gold/silver ratio taking off from its historical standard of 14-to-1, that has to do with the global bimetallic monetary systems that existed before the 19th century. Here in the U.S., the value of gold-to-silver was 15-to-1, for example. This was based off the market supply of the metals – there was 15 times more gold than silver. Both metals were serving the same purpose – one was just more abundant than the other and therefore had more value.
Silver lost its appeal during the gold rush in the U.S. and as we moved closer to the 19th century, it was effectively demonetized and became a more irrelevant metal. Gold was still used in the monetary system. Silver was not and was in lower demand. So, it’s no surprise that the gap in the two prices began to widen.
In the 1930s, the U.S. government fixed the price of gold at $35 an ounce, which continued in one way or another until 1972 (with some tweaking along the way).
Between 1934 and 1972, you had silver at market price moving against a fixed gold price. When the gold standard was abandoned, gold was then allowed to float at market price.
So that’s essentially where we’re at now. The historical standard was set because it was an exchange rate for two metals used as currencies, based on the supply of the metal.
But when both were taken out of the monetary system their prices moved freely as dictated by market demand. This is just a brief overview, but for more information on this I would highly recommend reading McGuire’s book mentioned in the article, information on the gold/silver ratio can be found in chapter 5.
As far as the value of gold is concerned – and the issue of that metal being underpriced, I’ll refer you to some of what we have already written on this. Our Global Resource Specialist weighs in on this one here in his gold price forecast for 2015: http://moneymorning.com/2014/12/17/gold-price-forecast-2015-driven-by-these-two-key-factors/
Thanks for reading and thanks for your thoughtful question,
Jim B.
Looking forward to sanity in the markets in my lifetime. I like your viewpoint.