The Gold / Silver Ratio: From 1300 to 1900... And Now

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TABLE: If you still have doubts about allocating a little of your portfolio into silver, these historic gold/silver ratios may make you think twice. Table courtesy of John F. Chown's "A History of Money"

Today the gold/silver ratio stands at 67,98 - I hope to have your permission to round it to 1:68. Now that Markowitz' model of risk-free portfolio diversification has been proven as wrong as did the Black-Scholes option pricing formula, I am more than inclined to seek my clues in centuries old relationships.

It can be safely said that markets either overshoot or undershoot, but are never in equilibrium (can any economist write a formula to scientifically prove my common sense assumption!?) Take your own conclusions.

Disclosure: long bullion and adding.

Comments

[GMiki1:]

Long bullion, eagles (not the birds), and mining stocks. Looking askance at the mainstream. Whatever are they thinking? Silver is golden, but gold's not too shabby.

Jul 31 11:11 AM

[Steve in Gr...:]

Silver and the PGMs will recover from their currently depressed levels v gold and return to their historical ratios, but only when the economy recovers, not before. This is because they are primarily industrial metals. And the economy has not begun to recover.

Jul 31 11:42 AM

[AssetReset:]

The real stuff and junior miners are lining my pockets (I have small pockets)
There will be a race to currency devaluation as the Chinese and the US have clearly stated that currency strength takes a back seat to "recovery"

Jul 31 12:07 PM

[systemBuilder:]

Who buys silverware any more?
Who uses chemical film any more?
Silver .. duh duh ... duh duh .. UGH! What is it good for? ABSOLUTELY NOTHIN' (to the tune of the anti war 1960's song ...)

Jul 31 03:25 PM

[avi8tor:]

Actually, yesterday a one ounce Canadian Maple Leaf (.9999) paid for one Stella, one Heineken, one Molson Canadian and a tip for my waitress at the pub near my house.

I wanted to see if they would let me use it for the bill and the pub owner snatched it from my hand without giving it a second thought.
I will continue to buy the 9999's and you can continue to mock them... if you like, this time next year we can compare how much I will be able to purchase with that same one ounce coin versus you with $20.

I'll bet you 10 of them (the coins, not your paper) that I'm the winner!




On Jul 31 03:25 PM systemBuilder wrote:

> Who buys silverware any more?
> Who uses chemical film any more?
> Silver .. duh duh ... duh duh .. UGH! What is it good for? ABSOLUTELY
> NOTHIN' (to the tune of the anti war 1960's song ...)

Jul 31 04:01 PM

[ryshay2:]

On Jul 31 03:25 PM systemBuilder wrote:

> Who buys silverware any more?
> Who uses chemical film any more?
> Silver .. duh duh ... duh duh .. UGH! What is it good for? ABSOLUTELY
> NOTHIN' (to the tune of the anti war 1960's song ...)

Let's count the ways:

Silver: The Green Metal
www.hardassetsinvestor...

Unlike gold, says Morgan, which is useful predominately as a store of value, "silver has a dual personality, as both an industrial and monetary asset."

Silver's innate physical properties make it an ideal ingredient in several industrial applications. As nature's best electrical and thermal conductor, the metal is perfect for high-performance electronics or high-voltage circuits. Silver's high reflectivity makes it a must for fine-precision optics, and photosensitive silver compounds are the engine behind photographic film. The metal is even a natural biocide, which is handy in sterilization and treating wounds.

Given silver's valuable characteristics, it's not a big surprise that industrial demand for the metal has risen every year since 2001. The industrial sector now accounts for 54% of global silver usage. (The remainder breaks down into luxury demand - namely, the jewelry trade - and investment demand.)

"Not only is industry the fastest-growing segment of demand for silver, it's also the largest," says Morgan.

Demand could continue to grow long term, since silver is a component in many up-and-coming "green" technologies. Photovoltaic cells in solar arrays require silver coatings. Water purification plants use silver compounds to prevent bacteria and algae buildup. And super-efficient, eco-friendly silver-zinc batteries may soon supplant their lithium-ion cousins in the rapidly growing electric car market.

"Silver is a very clean metal, a very green metal," says Morgan. "And it's also inelastically priced: For some applications, no matter how you price it, you have to use silver."

Another growing demand comes from silver ETFs, which despite their relative newness, have attracted a significant following among individual investors and institutions, like pensions and insurance companies (which can't access the derivatives market). Combined, the silver ETFs added 63.5 million ounces to their stocks throughout the first three months of 2009, and the iShares Silver Trust ETF (NYSE Arca: SLV) now holds over 270 million ounces of fine silver - roughly three-fifths the total silver stocks, says Morgan.

Jul 31 04:22 PM

[psig:]

The problem with these ratios is that there was very little historic gov't and banking monkey business with the markets world wide like they do now. I am not convinced any metals ratio can be predicted nowadays because of all the well known, admitted to, and apparently legal manipulation by the big banks and gov't. Notice that the ratio started rapid change about the time the gov't and banks became able to manipulate on a large scale. I no longer discuss manipulation as a back room operation. Its apparently admitted to and I guess legal and used to stabllize the dollar. Not that I necessary agree with manipulation and don't think it is slimey and harmful to the economy in the long run. Now having said all of this the historic ratios could return if the dollar collapses. Maybe thats where the author would end up in conclusion with another paragraph but who wants a dollar collapse? I guess maybe George Soros and James Bond's Goldfinger.

Jul 31 06:49 PM

[nmelendez:]

Every single government and large entities (can you say Goldman Sacks) try's to manipulate the market in it's favor.


On Jul 31 06:49 PM psig wrote:

> The problem with these ratios is that there was very little historic
> gov't and banking monkey business with the markets world wide like
> they do now. I am not convinced any metals ratio can be predicted
> nowadays because of all the well known, admitted to, and apparently
> legal manipulation by the big banks and gov't. Notice that the ratio
> started rapid change about the time the gov't and banks became able
> to manipulate on a large scale. I no longer discuss manipulation
> as a back room operation. Its apparently admitted to and I guess
> legal and used to stabllize the dollar. Not that I necessary agree
> with manipulation and don't think it is slimey and harmful to the
> economy in the long run. Now having said all of this the historic
> ratios could return if the dollar collapses. Maybe thats where the
> author would end up in conclusion with another paragraph but who
> wants a dollar collapse? I guess maybe George Soros and James Bond's
> Goldfinger.

Jul 31 09:24 PM

[Value Added:]

Though your historic ratios of gold:silver are interesting, I don't believe they are relevant for assessing the current situation when taken further back than a couple of decades. A lot has changed since the year 1300 - and concerning these two metals, it's a totally different world. Primary usage of these metals in 1300 was for coinage/jewelry etc., and today the usage for gold is essentially unchanged, except for the addition of dentistry to the list. Silver on the other hand has found numerous industrial uses and is being depleted. In 1300, there was more silver available than gold (hence gold's premium), but today there is actually more gold available above-ground than silver, just the reverse. So while I agree with you completely that the current price ratio is a distortion from what one should expect, I think we should be looking at the fundamentals of supply and demand, which would indicate that the current ratio is even more extremely out of balance than what you are suggesting. Hold onto your hat - it's going to be one wild ride.

Aug 01 09:19 AM

[Northstar10000:]

The very best person in commodity trading says silver is his number one commodity AFTER AUgust. Buy now if you like but a better entry point is shortly ahead.

Aug 01 09:55 AM

[Poborsky:]

It is not many years ago that silver was used in coins. I believe that one of the reasons it was removed, apart from cost , is because the coins naturally become worth more than the paper notes of much higher notional value, as inflation takes its toll on fiat currency and our masters are well aware of this. The population would already have started discarding fiat paper for something with a store of value. In Zimbabwe the people have chosen to use US dollars, (the world reserve currency), because their own currency is worthless. In the US, when hyper-inflation hits, gold and silver coins will become the preferred method of payment. In the UK it will probably be a mixture of coins with silver content, pure gold and silver coins, and euros.

Aug 01 10:29 AM

[HATEFEEBAY:]

Are you kidding me? Every cell phone, PC, radio, car has some silver in it, you are an idiot!

Long, physical and SLW


On Jul 31 03:25 PM systemBuilder wrote:

> Who buys silverware any more?
> Who uses chemical film any more?
> Silver .. duh duh ... duh duh .. UGH! What is it good for? ABSOLUTELY
> NOTHIN' (to the tune of the anti war 1960's song ...)

Aug 01 11:19 AM

[Barry Robbins:]

I own silver through CEF (fund owns real gold and silver, audited). I also own HL, which has incredibly cheap book value of 0.87. Find me another growing silver/gold company that can beat that book value.

Aug 01 01:21 PM

[specks:]

When silver reaches around $6 to $8, then, I might be a buyer. Today, no thank-you!!

Aug 01 02:18 PM

[tc1:]

Many people want to say that “15 to 1” is the traditional ratio of gold’s price to silver’s price. BUT SINCE 1971 (when Nixon took the USD off the gold standard), 55:1, not 15:1, is the repeatedly-tested ratio, says Big Gold newsletter editor Doug Casey (see April 2009 special issue on silver). Gold-silver expert Trace Mayer agrees.

I was playing with the math a while back: If the economy recovers and industrial use of silver picks up and the gold-silver ratio dropped a bit further down to 50:1, and gold went up to $1,000, silver would be at $20. Moreover, if gold broke up to $1,200, a 55:1 ratio puts silver at $21.80; while a 50:1 ratio puts silver up at $24. If gold rose to $1,200, this current ratio of 68:1 would put silver only at $17.65, and if gold only reaches $1,000, a 68:1 ratio brings silver only up to $14.70, not even as high as $16, which it briefly surpassed on June 4, ‘09. If gold went to $1,500, the 55:1 (or much lower) ratio would be more realistic, and silver would be at $27.

At a 20:1 ratio (the future ratio seen by silver bugs like Sean Rakhimov), silver would be $75/oz—but it is MOST doubtful that JP Morgan (by far the biggest short-seller and manipulator of silver’s price) would let silver hit this high because of its negative impact on industry.

Aug 01 02:24 PM

[Plebian:]

Your assumption is incorrect. The economic collapse that we are witnessing right now is due to the world-wide experimentation with fiat currency (funny money), which started in earnest when the US$ became no longer convertible for gold in 1971 (and silver stopped being coined as money in the 1960s). Soon enough, people all over the world will realize that the current economic crisis we are facing is indeed a 'currency crisis' waiting to explode. By then, the economy all over the world may be in the dumps, but everyone will flock to silver and gold (and PGMs) as real stores of value and wealth.... Remember, before they could get rid of the gold standard, they first had to get rid of the silver standard. Silver is the money of the US Constitution and of the people.

On Jul 31 11:42 AM Steve in Greensboro wrote:

> Silver and the PGMs will recover from their currently depressed levels
> v gold and return to their historical ratios, but only when the economy
> recovers, not before. This is because they are primarily industrial
> metals. And the economy has not begun to recover.

You did not define $. Perhaps you mean $6 to $8 of some new global currency (valued a 10X the US$). Then silver would be US$60 to $80/oz, when everyone and their neighbor will be trying to jump on the bandwagon...

On Aug 01 02:18 PM specks wrote:

> When silver reaches around $6 to $8, then, I might be a buyer. Today,
> no thank-you!!

Aug 01 03:17 PM

[Plebian:]

Please note that silver is NOT being manipulated to support industry--they are not saints trying to save the world!

No, silver (like gold) is being manipulated to maintain control of the use of fiat currency. Due to the much smaller market size, silver is much easier to manipulate compared to gold. And when you manipulate silver, you will manipulate gold...

On Aug 01 02:24 PM tc1 wrote:


> At a 20:1 ratio (the future ratio seen by silver bugs like Sean Rakhimov),
> silver would be $75/oz—but it is MOST doubtful that JP Morgan (by
> far the biggest short-seller and manipulator of silver’s price) would
> let silver hit this high because of its negative impact on industry.

Aug 01 03:32 PM

[montross515:]

WRONG. There is 5 times more gold above ground than silver in the world at this time. The story below ground may be similar as most silver is shallowly buried, and already mined.


On Aug 01 09:19 AM Value Added wrote:

> Though your historic ratios of gold:silver are interesting, I don't
> believe they are relevant for assessing the current situation when
> taken further back than a couple of decades. A lot has changed since
> the year 1300 - and concerning these two metals, it's a totally different
> world. Primary usage of these metals in 1300 was for coinage/jewelry
> etc., and today the usage for gold is essentially unchanged, except
> for the addition of dentistry to the list. Silver on the other hand
> has found numerous industrial uses and is being depleted. In 1300,
> there was more silver available than gold (hence gold's premium),
> but today there is actually more gold available above-ground than
> silver, just the reverse. So while I agree with you completely that
> the current price ratio is a distortion from what one should expect,
> I think we should be looking at the fundamentals of supply and demand,
> which would indicate that the current ratio is even more extremely
> out of balance than what you are suggesting. Hold onto your hat -
> it's going to be one wild ride.

Aug 01 10:25 PM

[realold:]

Maybe I was just unable to see the rest of your chart, but you left out the last one hundred years with higher ratios. Why? Trying to over-emphasize your point? If so, shame.

Silver is a by-product of other mining (negative?), is used up by various things other than making film (positive), and is a more reasonable means of exchange than biting off a piece of a one ounce gold coin. So, you didn't need to hide the last century. It does seem more volitile - wait for a better entry point?

Aug 02 01:34 AM

[systemBuilder:]

thanks for elaborating on the industrial uses of Silver. While I agree that it's very important in making, say, a hand mirror or a 200 inch telescope mirror, I doubt it will ever be very important in a field (such as IC fabrication) for the following reason:

search.barnesandnoble....

We are experiencing a limit to IC speed and performance not because of resistivity (which was substantially overcome by the use of copper interconnects in the late 1990's), but rather, because the WIRES in an integrated circuit dominate the performance of the circuit now more than the transistor sizes. Transistors have shrank so far that they are literally (on an atomic scale) blocks away from each other, if you consider each transistor to be a house. And, in my own work as an electrical engineer, I have seen copper and gold contacts but NEVER silver contacts in electronics.

Sep 23 04:37 PM