This week we run through the gold/silver ratio, what it is, what it has been in the past, where it is today, and what it can tell us about future precious metal prices.
Three out of two people have trouble with fractions!
If math was never your strong suite at school, you may want to look away now.
A ratio is simply a way of explaining the relationship between one set of “ things” and another set of “things.” For example, if I go to a party and there are 20 men there, and 10 women, the ratio of men to women would be 2:1. Conversely, the ratio of women to men would be 1:2.
Historically, gold and silver have been expressed as a ratio to indicate the proportion of each metal available in the market, in relation to the other.
If there is more silver than gold in circulation, the gold will be more valuable – because there is less of it.
The free market sets the value of gold and silver against each other, based on the quantity of each in circulation.
The gold-to-silver ratio is the amount of silver it takes to purchase one ounce of gold.
As an example: a $1200 gold price divided by a $16 silver price is approximately 75 – this is the Gold-to-Silver Ratio – 75:1 – it takes 75 ounces of silver to buy one ounce of gold.
This principle applies, as the two metals are doing the same thing – acting as a store of value, and enabling people to buy goods and services with them. Add in other industrial uses, such as jewelery, electronics, mirrors, etc – and this will skew the gold/silver ratio.
From the 13th century, and up until a hundred years ago, the gold/silver ratio was 16:1 or lower. Only in the last hundred years has the ratio been above this 16:1 figure.
On several occasions, the ratio has gone as high as 100:1.
The US geological survey found that, in the earth’s crust, in their natural states, gold and silver had a ratio of 17:1. The recoverable, or “mineable” supplies, however, reduce this to about 9:1.
What this means is, that all things being equal, silver should be 1/9 the price of gold today. It is actually around 70:1.
Unlike gold, which is specifically mined as a commodity in its own right, silver is usually a by-product of another metal mining process. There are very few primary silver producers.
Because of this, it has always been a much cheaper metal to extract than its yellow cousin.
There is a general belief in the precious metals industry that silver is extremely undervalued. The current gold/silver ratio would tend to confirm this.
If all the world’s assets were taken – stocks, bonds, ETFs, insurance policies, etc. – just 1% of this money is in physical gold.
But only .02% is in physical silver.
That means that if just .04% of the world’s money was invested in silver – this market would double.
Given the economic straits of the world governments at present, and the likelihood of them being able to reverse their deficits and commitments to spend in the foreseeable future, people will increasingly look for safer vehicles in which to put their money.
Back in 1979 the value of gold shot up from $300 to $850 in eight weeks, when people in the United States became scared that the dollar was going to fail. Bear in mind, that this was a US only phenomenon.
Imagine what would happen to the price of gold if the whole world thought the dollar was going to fail.
At that time, many of the countries that we regard today as normal trading partners, such as Russia and China, were shut out of the markets completely – their peoples were simply not able to participate in the market.
One of those countries was India. Recently, the Indian government have made a concerted effort to get the Indian people to buy silver rather than gold, by raising the import taxes imposed on gold, to make it less attractive as an investment. (See our series on the war on cash for more on this idea.)
With a population of over 1.3 billion people who are used to investing in precious metals – historically, in gold – and given the world market figure of .02% above, it is easy to see how quickly the demand for silver could double, and what that might do for worldwide silver prices.
Just in case you needed a reminder…
Gold would need to go up $1,200 to double its price – silver would need to go up $16.
Which do you think is more likely?
One of the easiest ways to get started protecting your future is with a precious metals IRA. At Noble Gold, expert advisers will walk you through the entire process step by step. Visit their website to get your free Gold Investors Guide and learn more about the benefits of investing with precious metals.
Article courtesy: Noble Gold