Gold / Silver Ratio

The “silver/gold ratio” is a measure of how many ounces of silver are required to purchase one ounce of gold. For example, recently, the silver/gold ratio was over 82:1. That means that, at current prices, it took 82 ounces of silver to buy 1 ounce of gold.
In the past century, that ratio has varied from 12:1 (twelve ounces of silver would buy one ounce of gold) to 100:1 (100 ounces of silver could buy 1 ounce of gold). When the ratio is high (100:1) gold is gaining value faster than silver. When the ratio is low (12:1) silver is gaining value faster than gold.

If you understand and can accurately predict the future silver/gold ratio, you can tell which metal is the better buy at a particular moment.

Bug Wars
I’m a dedicated “gold bug”. I have nothing against silver, but I much prefer gold.
For the past four or five years, I’ve listened to those annoying little “silver bugs” argue that the current high silver/gold ratio (80:1) can’t be sustained. I agree with them. They’re right. The current high ratio can’t be sustained.

Sooner or later, the ratio will fall. While the ratio is falling, those who’ve invested in silver will, on a percentage basis, profit more handsomely than those who’ve invested in gold. I get that. I get tired of hearing it, but I get it.

The most vocal silver bugs bug me because they argue that the silver/gold ratio is due to fall to 20:1, or 15:1 or even 10:1. Predictions for such super-low ratios are based on various facts such as that government has, in past, legislated low silver/gold ratios-or, alternatively-because the world only mines a fraction as many ounces of silver each year as it does gold, but the industrial demand for silver is far greater than it is for gold.

If those arguments were true and relevant, and if the silver/gold ratio fell below 20:1, those who invested in silver might generate profits that, on a percentage basis, were four to eight times greater than those who invested in gold. If so, the annoying silver bugs would prove that they waaay smarter than the stuffy old gold bugs.

Why 50:1?
For the past five years, I’ve thought that the most likely “normal” ratio between silver and gold would wind up being about 50:1. I had no fundamental reason of my own to pick 50:1-except for this: The value on freshly-minted, one-ounce Gold Eagles is declared to be “FIFTY DOLLARS” and the value on recently-minted, one-ounce Silver Eagles is “ONE DOLLAR”. I therefore concluded that the future and inevitable silver/gold ratio would have to be 50:1.

Why? Because I couldn’t believe that the government picked the 50:1 ratio (seen by comparing Silver Eagles to Gold Eagles) out of thin air. They didn’t throw a dart at a dart board. They didn’t draw numbers out of a hat. I believed they had to have a reason.

I didn’t know what that reason was. Still, for the past five years, I was sure some good reason had to exist to support the 50:1 ratio. Now, however, I finally know why the silver/gold ratio will most likely settle somewhere around 50:1. Why? Because that’s what it’s been, on average, for the past century.

How do I know? A graph from ZeroHedge:

I assume that graph is accurate-with one exception: its title. Because today’s silver/gold ratio first measures the number of ounces of silver (80) in relation to the number of ounces of gold (1), I believe the ratio should be referred to as the “silver/gold ratio” rather than the “Gold/Silver Ratio”. Silver is the first metal listed in the ratio; gold is second. The ratio should be referred to as the “silver/gold ratio”.

However, the graph refers to the “Gold/Silver Ratio” and strikes me as technically incorrect. Quibbling aside, you get the idea. The numbers on the left side of the graph tell us how many ounces of silver were required to purchase one ounce of gold during the past century.

I also assume that the blocky, stair-step representations of the ratio on the left half of the graph reflect prices officially established by government edict while silver was still backing some or all of our paper dollars.

I also assume that the spikey representations in the price ratio on the right half of the graph represent the time after silver was no longer backing the US dollar and its price was determined by markets more so than by the government. Because the free market prices are in a constant state of flux, the silver/gold ratio was also constantly changing and therefore “spikey”.

Obvious Conclusions
Judging from the graph, a couple of conclusions are apparent.

First, the silver/gold ratio has been all over the board for the last 100 years. There’ve been highs near 100:1, lows of 13:1, and everything in between. Even when government was presumably legislating the silver/gold ratio, it’s unusual to find a point where the ratio held steady (flat on the graph) for more than a year or so. There’s only one place (in the early 1960s) where the ratio held steady for 2 or 3 years.

The ratio’s volatility has been persistent and significant. Why? Because that volatility proves that the prices of gold and silver do not move in lockstep. If the prices of gold and silver both went up by 20% or both went down by 30%, the graph of the silver/gold ratio would be fairly flat. Because the graph of the silver/gold ratio is “spikey” we see evidence that gold and silver do not more in lockstep and therefore respond very differently to changes in the economy and monetary system.

Second, the silver bugs were right in alleging that the silver/gold ratio has been between 12 and 20 in the past. But if you look at the graph, you’ll see that such events were rare (only three times in a century) and short-lived. If the duration of all three, sub-20:1 instances were combined, I doubt that they’d add up to more than a total of one year out of the past century. That tells us that any silver/gold ratio below 20:1 is unlikely.

Third, although some silver bugs have argued that silver/gold ratios below 20:1 are somehow “inevitable” and an historical norm, they weren’t basing their arguments on the data for the past century. In the three instances when ratio fell below 20:1, the result was an almost instant “bounce” back upward.

A silver/gold ratio below 20:1 is not the norm-or close to it. Instead, it’s a lower limit that signals extreme market irrationality and predicts a sudden and significant bounce back up to higher, more reasonable ratios.

Fourth, silver bugs who argue that the silver/gold ratio must inevitably fall below 20:1 and stay there for any length of time are fibbing.

(I know, I know. Who could dream that anyone selling silver would fib about the reasons to buy that metal? Nevertheless, given the data for the past one hundred years, the silver bugs’ argument that the silver/gold ratio must return to below 20:1 is silly and can only be explained by silver bugs being ignorant or fibbing.)

Fifth, if we were to subjectively level this graph and fill in the low valleys with the high peaks, it looks to me as if the average silver/gold ratio in this extremely volatile century of data is about 50:1. Thus, the government’s 50:1 ratio implied by the prices on modern Silver and Gold Eagles makes sense.

Sure, the ratio could fall from 80:1 to 40:1 or even to 30:1. But if it does, it will probably bounce back up towards 50:1. The silver/gold ratio is too volatile to ever stabilize at 50:1. Still, if you want to bet on one silver/gold ratio that’s most likely to be coming, bet on something closer to 50:1 than to 15:1

Sixth, the spectacular profits predicted by some silver bugs when silver goes back to 15:1 are contrary to the last century’s data on silver/gold ratio. Future profits in silver should be good, but not fabulous.

Possible Silver Profits
Of course, a fall from today’s 80:1 ratio to a future 50:1 ratio is nothing to sneeze at.
If the silver/gold ratio falls from 80:1 to 50:1, those who invest in silver could make about one-third more than those who invest in gold. Those who invest in gold, should do well. Those who invest in silver should do better.

However, a future silver/gold ratio of 100:1 is also possible and also nothing to sneeze at.
The silver/gold ratio has hit 100:1 twice before in periods of extreme crisis (WWII and Viet Nam war) and, in theory, if global economic crises continue or increase, the current 80:1 ratio might rise to 90:1 or even 100:1. If the ratio rises from 80:1 to 90:1, those who’ve invested in silver will lose about 12% as compared to investing in gold. If the ratio rises from 80:1 to 100:1, silver investors will lose about 25% as compared to gold investors.

So long as the silver/gold ratio is rising, gold is a better investment than silver.

But that’s the question, isn’t it? Will the silver/gold ratio rise or fall?

Mostly Similar or Mostly Different? recently published the article “Silver Soars Post-Fed As Gold Ratio Tumbles Most In 5 Months.” According to that article,

“Two weeks ago, the Silver/Gold ratio exceeded 82:1 . . . This isn’t normal. . . . In modern history, the gold/silver ratio has only been this high three other times, all periods of extreme turmoil-the 2008 Great Recession, the Gulf War, and World War II.”

The relationship of the silver/gold ratio to geopolitical and economic crises tells us that, in times of extreme crisis, the go-to metal is gold-not silver. Gold.

Over the past century, the silver/gold ratio’s volatility illustrates that:

1) In times of crisis, the relative performances of gold and silver is significantly different; and,
2) Gold and silver are so fundamentally different that they can’t be expected to rise or fall in lockstep. Yes, both metals can rise at the same time or fall at the same time. One can go up while the other goes down. But the relative difference between both metal’s rise or fall can be significant.

I.e., just because the price of gold is rising, doesn’t necessarily mean that the price of silver will also rise in direct proportion. Gold could rise by 20% while silver rose only 5%.

Just because the price of silver is rising, doesn’t necessarily mean that the price of gold will also rise in direct proportion. Silver could rise by 20% while gold rose only 5%.

In fact, since the 1st of January (until March 25th) the price of gold was up 14.7% while the price of silver is up only 8.6%. The prices of both metals have enjoyed significant increases, but those increases have not been equal. The two metals are not moving in lockstep. Whichever way and to whatever extent either metal moves will depend on the economic and geopolitical context. Gold could go up while silver goes down. Silver could rise while gold falls.

If you look at the graph, you’ll see that the highest silver/gold ratios (80:1 to 100:1) take place in times of crisis (WWII, Viet Nam, Lehman Brothers’ collapse, the 2008 Great Recession) when the price of gold is rising much faster than the price of silver. The prices of both metals may be rising, but crises favor gold significantly more than silver.

Conversely, look at the graph again, and you’ll see that and price of silver rises faster than gold during periods without crisis. The result is low silver/gold ratios below 20:1.

During these non-crisis periods, silver gains more than gold because silver is primarily an industrial metal. I.e., when there’s no crisis, the economy and industrial production do well, industrial demand for silver swells, and the price of silver rises faster than that of gold, causing the silver/gold ratio to fall. The prices of both gold and silver might both rise, but the price of silver will rise faster. Periods without significant crises favor silver more than gold.

In short, during good economic times, the price of gold (primarily a monetary metal) should drop in relation to silver while the price of silver (primarily, an industrial metal) should rise (in relation to gold).

Conversely, during periods of crisis (like the onset of WWII and the Viet Nam war) the price of gold-primarily, a monetary metal-should rise faster than the price of silver which is, primarily, an industrial metal. Judging from the graph and generally speaking, good economic times are best for silver; bad economic and bad monetary times are best for gold.

Very Different Metals
The silver/gold ratio provides strong evidence that gold and silver are two very different metals whose prices move up or down for very different reasons. Therefore, the price distinctions and constant volatility seen in the graph of the silver/gold ratio indicate that, contrary to the silver bugs’ siren song, silver is not precisely a “poor man’s gold”.

Yes, silver is, to some extent, a monetary metal. To that extent, silver is a “poor man’s gold”. But silver remains, primarily an industrial metal. To that extent, silver might be more of a “poor man’s platinum” (another industrial metal) rather than a “poor man’s gold”.

For the sake of comparing the “natures” of silver and gold, I’d guesstimate that the nature of silver is, say, 80% industrial and 20% monetary. If so, the price of silver will move up or down based primarily on changes in the GDP and, particularly, on industrial demand. Monetary influences (money supply, interest rates, inflation/deflation) will affect the price of silver, but to a lesser degree than “industrial” influences.

Gold, on the other hand, strikes me as more like 90% monetary and 10% industrial. Changes in industrial demand for gold will affect its price, but only to a minor degree. Changes in monetary policies or monetary fears (OMG-is the dollar going to die?!!) will have the major impact on the price of gold.

We can quibble over whether correct industrial/monetary mix for silver is 80/20 or 60/40, but the point remains that silver is predominately an industrial metal. As such, we can hypothesize that silver’s price will therefore primarily reflect industrial forces such as supply and demand.

Likewise, gold’s monetary/industrial ratio might be 90/10 or 70/30. But the fact remains that gold is primarily a monetary metal. While its price may vary to some minor extent based on industrial demand, gold moves mostly due to monetary issues (national debt, currency supply, inflation/deflation, interest rates, the life-expectancy of any currency and/or geopolitical conflicts).

Predicting the Future
Given the differing natures of silver and gold, if you want to invest in precious metals, your first step should be to decide how you believe the economy and monetary system will change in future years.

As you peer into our economic future, are you optimistic or pessimistic? Do you expect to soon see an economic “recovery”? If you do, then the price of silver should rise in relation to gold, the silver/gold ratio should fall from 80 to, say, 60 or even 40-and industrial silver is a better buy than monetary gold. The prices of both gold and silver may rise, but if the economy is recovering, silver should rise faster than gold.

On the other hand, if your crystal ball tells you to expect several more years of recession, possible depression and continued crises in Syria, the South China Sea, the EU, Japan, Ukraine, Venezuela, Brazil, Belgium, the “oil patch” and perhaps Wall Street, Main Street and Pennsylvania Avenue-then the prices of both gold and silver may rise, but the price of gold should rise faster. We might see a silver/gold ratio of 90:1 or even 100:1. In that case, the smart buy is gold.

So-what do you see coming? More of the fabled “recovery”? Or more crises?

In broad strokes, your answers to those questions should tell you whether your best current investment bet is gold or silver.

Hedge Your Bet
Can’t make up your mind? Then maybe you can hedge your bet by buying both gold (in case of monetary crisis) and silver (in case of an industrial recovery).

In fact, based on the previous conjecture, silver might be viewed as less of an alternative to gold than as a hedge. If so, then if you thought that the odds of continuing crises compared to the odds of an economic recovery were, say, 80:20, then you might want to spend 80% of your investment dollars on gold and 20% on silver. If you thought the likelihood of continuing crisis was 50% and the likelihood of economic recovery was 50%, you might choose to spend 50% of your investment dollars on gold and 50% on silver.

The best precious metals investment will be the one that conforms most closely to our economic and political future.

Personal preference and Convenience
In addition to investing based on your personal predictions of future economic and monetary policies, you can also base you investments on personal preference and convenience. For example, I have a little gold and a little silver. Even though I expect silver to enjoy larger profits on a percentage basis than gold, I still prefer to hold gold over silver. My preference reflects my age, personal circumstances, the difference in weight of the two metals and the difference in the two metals’ natures.

If I were younger, I might jump into silver. But, being a senior citizen, I can appreciate a measure of stability. The price of silver is in a constant state of flux. Whatever that price is today, it won’t be that tomorrow. It could go much higher, it might go much lower. I don’t want to be asking myself on a daily or hourly basis if I should have sold silver because it might be at its peak or if I should’ve bought silver because it might be at its bottom.

Compared to silver, the price of gold is less volatile and feels more conducive to my rocking-chair lifestyle. I don’t like the stress that silver offers, so I prefer gold. I have more confidence in gold than in silver.

And then there’s the weight issue. At today’s 80:1 silver/gold ratio, it takes five pounds of silver to purchase one ounce of gold. Even at 50:1, it still takes three pounds of silver to equal the purchasing power of one ounce of gold.

It’s a lot easier to hide or transport one ounce of gold than it is to hide/transport three pounds of silver. I could hide a small fortune in gold in the attic without adverse effect. If I tried to hide an equivalent fortune in silver in the attic, there’d be visible lumps in the insulation, and the weight of the silver might even cause some of the ceiling on the first floor to cave in.

On the other hand, silver has utility precisely because it has less value per ounce. In a worst case scenario, it will be hard to use one-ounce of gold worth $1,500 to buy a loaf of bread and some hotdogs at the grocery store. How will the store owner make change? But, at a 50:1 ratio, my silver eagle will be worth $30 and should therefore be convenient for making my small grocery store purchases.

Of course, if the silver/gold ratio were 50:1 and I wanted to buy a used pickup priced for $10,000, would I rather pay with 7 ounces of gold or 22 pounds of silver? Gold is more convenient for saving, hiding, transporting or making large purchases. Silver should be more convenient for small, day-to-day purchases.

Both gold and silver are smart investments. In today’s economic and political climate, they’re better investments than almost anything else. In either case, you’re likely to profit handsomely. But, for some, gold is a better “fit”. For others, silver.
If you invest in silver and if we see some economic and industrial recovery, you might make 30% to 50% more than you’ll make investing in gold. But you won’t make 400% to 800% more on silver than you will on gold. Any silver bug who tells you differently is probably fibbing.

If you invest in gold and the geo-political and monetary crises continue or increase, your profits should be greater than if you invested in silver.

The question remains: Where do you think the U.S. and world economies are headed? Back towards economic recovery or deeper into crises? Your answers to those questions should guide your investment decisions.