Silver and Gold
Silver and Gold
Everyone wishes for Silver and Gold
How do you measure its worth?
("Silver and Gold" - Burl Ives)
How do we measure its worth? One important metric is the gold to silver ratio. That is, simply the price of gold divided by the price of silver.
There has always been a high correlation between gold and silver prices. In fact, throughout much of history, the ratio was fixed. Here are some highlights (source - investopedia.com):
- 323 B.C. - The ratio stood at 12.5 upon the death of Alexander the Great.
- Roman Empire - The ratio was set at 12.
- End of 19th Century - The nearly universal, fixed ratio of 15 came to a close with the end of the bi-metallism era.
In ancient Egypt, when silver was first introduced it was very likely more valuable than gold. Those Egyptians from around 2500 B.C. considered gold to be the skin of the ancient Egyptian gods and silver to be the bones.
Let's fast forward to the 20th century. It is not uncommon to see comments on SA and other places about a possible return to a ratio of 15. Is that reasonable? Sorry, but no, it is not. There was only one time since the United States went off the gold standard in August 1971 in which the gold/silver ratio touched 15 and that was during the Hunt brothers attempt to corner the market in late 1979/early 1980.
That game soon came to an end with a mighty drop of 50% on March 27, 1980 - silver went from $21.62 to $10.80. By the way, the Hunt brothers later declared bankruptcy and were convicted of conspiring to manipulate the market.
Now I will zoom in on the last few years. This time frame is more relevant to what we can expect from the gold/silver ratio.
The above chart is a weekly scale, so the blue line titled MA(200) is the 200-week moving average. Here we can see that we could be in the final stage of a triple-top for our ratio. If so, there should be 1-2 more months at the mid-60's level and a drop may occur in October or so.
Below is a chart of the iShares Silver Trust ETF (NYSEARCA:SLV) compared to the SPDR Gold Trust ETF (NYSEARCA:GLD) since SLV's inception date of April 21, 2006. Note the performance of SLV from late 2008 through mid-2011 and the marked underperformance of SLV since mid-2011. More on that below.
Silver and gold have a strong correlation. On a daily basis, the two metals have moved in the same direction 73% of the time since 1968. However, silver is the more volatile of the two. The white metal often shoots higher than gold during bull markets and drops lower during bear markets (on a percentage basis, of course). The YCharts graph above clearly shows that phenomenon happened in the last bull and bear markets. The 12-month moving average of the gold/silver ratio hit 44 in October 2011 - the lowest value it had been since 1984.
It would be no surprise, therefore, if a reversion to the mean in the gold/silver ratio was accompanied by a bull market for the two metals. Within the next 12-18 months I look for the gold/silver ratio to move lower to the mid to upper-50s level along with a rise in value of both commodities. I predict gold to move up about 10% to $1400 and silver to move up about 25% to $24.5.
Disclosure: The author is long SLV.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.