324 Years Of The Gold-To-Silver Ratio And $195 Silver

Includes: GLD, PSLV, SIVR, SLV
by: Plan B Economics

Warning: The following article contains data that some might find shocking. While the figures are grounded, they are not necessarily forecasts.

Since 1687, the gold-to-silver ratio has ranged from 14.14 to 99.76 (see chart below). Over this period, the average gold-to-silver ratio was 27.28 and today (March 8, 2012) the gold-to-silver ratio is 50.09.

If silver were to rise to bring the gold-to-silver ratio back to its long-term average, the silver price must rise to $61/oz. (Of course, gold (NYSEARCA:GLD) prices could also fall to lower the ratio. But let's assume gold is priced at fair value.)

If the ratio were to return to the pre-1900 average of 16.13, the silver price would have to rise to about $105/oz.

Source: Measuring Worth - The source of recent annual London Market Prices is the average of the daily London PM Fix found at Kitco. This is the price most users quote. The source of recent annual New York Market Prices for 2011 is from the U.S. Geological Survey and is an estimated value that may be revised.

Why might the historical gold-to-silver ratio have a natural average much lower than it is today? The chart below shows that the lower ratio might have a geological origin.

According to Jefferson Lab, silver is almost 19 times more abundant than gold within the Earth's crust. While this doesn't necessarily mean the deposits are accessible using modern technology, it possibly marks a natural long-run relationship between the two metals. To reach this ratio with gold, the silver price would need to hit approximately $90/oz.

A more relevant measure of physical availability is reserves and production. According to the US Geological Survey 'reserves' are defined as follows:

That part of the reserve base which could be economically extracted or produced at the time of determination. The term reserves need not signify that extraction facilities are in place and operative. Reserves include only recoverable materials.

According to US Geological Survey's Mineral Commodity Summaries (January 2012), 2011 reserves and production for silver was respectively ten and nine times as abundant than gold.

To adjust to the 2011 reserves ratio between silver and gold, the silver price must rise to about $165/oz. To adjust to the 2011 production ratio, the silver price must rise to about $195/oz.

Element Crustal abundance (ppm) Reserves (NYSE:T) Annual Production
Silver 0.075 530000 23,800
Gold 0.004 51000 2,700
Ratio 18.750 10.392 8.815
Source: US Geological Survey, Mineral Commodity Summaries, January 2012, Jefferson Lab.

In addition to the natural physical abundance and production data, which favors silver relative to gold, above-ground silver inventory is constantly depleted because it is used for industrial purposes. In contrast, most gold that has ever been mined exists in a vault somewhere.

Many investors that are bullish on silver buy using iShares Silver Trust (NYSEARCA:SLV), but some prefer the more 'physical' nature of ETFS Physical Silver Shares ETF (NYSEARCA:SIVR) and Sprott Physical Silver Trust (NYSEARCA:PSLV).

However, anyone truly looking to get physical can't beat the real thing: bullion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.