Saturday, February 04, 2006

 

The Price Ratio Of Gold To Silver

More than one reader wants to explore this topic: The historic ratio of gold and silver prices.

One added, "I'll toss in a vote for the silver vs. gold topic. Silver is IMHO going to be the story of the year with the ETF launch."

Another said, "The historical ratio between gold and silver is usually 15-to-1, not today's 58-to-1. If this ETF breaks the silver market's blatant price management, that alone would put silver at $40/oz."

And another, "I am of the opinion that we will see Silver trading in the 10 to 15 dollar range by years end. Longer term, 40 to 50 and perhaps higher(time will tell). Of course if the Silver ETF becomes a reality the upward trend will move along at a faster clip. A couple of years from now we'll look back and say,I remember when Silver was just $9. Just like we do now, looking back and saying, I remember when Silver was in the $4's."

And from the web, "During the first two thirds of the 19th century, the ratio of the price of gold and silver is close to 15. This ratio resulted from the legal relationship (as in France, England and the USA). The end of the century is marked by the almost generalized abandonment of bi-metalism by all of these countries. It is the deathblow for silver, forces acted at the same time on the supply (increase of production) and the demand (abandonment of bi-metalism). It was at this point that silver shed its crown of laurels."

"After the general demonitization of silver in the second half of the nineteenth century that constant alliance broke. The gold/silver ratio was as wide as 1:90 in the 1930s. Although it came back momentarily to 1:17 in 1980 in the Hunt Brothers' attempt to corner the silver market, it has fluctuated widely since World War II in a range from 1:30 to 1:98. Although there is no logic to the modern ratio, speculators do play the ratio, selling gold, buying silver and vice versa at what are seen as crucial chart points in technical analysis."

"When the first coins were made over 2,500 years ago in ancient Greece, the ratio of gold to silver was generally between 10:1 and 13.5:1, depending on the relative proximity of gold or silver mines. In the 1930's and 1940's the ratio reached 90:1 or higher, and in 1991 it peaked at about 98:1, although we have seen one source which claims over 100:1 peak. Other sources state that the gold silver ratio is no longer relevant in today's markets. We believe it is a worthwile measure, but would stress that it is difficult if not impossible to state what the ratio 'should' be."

Kitco tracks the ratio as well, at the bottom of the link.

Comments:
If nothing else, for someone who trades a bit in either market, keeping an eye on this measure can help detect when one or the other is getting ahead of itself. It does seem a little out of whack these days.
 
OT

What do you think of this:

A bullion-dollar bank account
Troubled times make gold an even more precious metal. Here's one way it can protect your treasure.

By Paul Sloan
February 4, 2006: 7:59 AM EST


SAN FRANCISCO (Business 2.0) - High oil prices. Inflation fears. Ballooning deficits. Guerrilla war. Bad news? Not for gold. The asset that shines in bad times has been on a tear recently, surpassing $500 an ounce, a level not seen in decades. In 2005, gold outperformed the fishtailing Dow Jones industrial average by about 19 percent.

But how to cash in? The last time gold prices were this high--in the 1980s--it wasn't easy for small investors to capitalize. Gold-mining stocks are notoriously volatile, and owning actual gold involved insurance and storage expenses. New tools, however, open the current gold rush to all comers. One of the cheapest and easiest ways to play is through GoldMoney.com, a thoroughly Internet-age company created by James Turk, a longtime goldbug and former banker with Chase.

Turk opened GoldMoney.com in 2001 on the English Channel island of Jersey. The company has gotten ink for its novel effort to create a gold-backed currency that companies can use for transactions, but so far GoldMoney's most successful venture is a retail arm that gives investors a new way to buy gold. The number of GoldMoney retail customers almost doubled last year to 17,000, with the total value of their gold reaching about $50 million.

GoldMoney is similar to online banking, except accounts are denominated in "goldgrams" and mils instead of dollars and cents (1,000 mils equals 1 gram). A typical gold bar weighs 400 ounces, which at current prices would fetch roughly $210,000. But GoldMoney lets customers buy any fraction of a bar. The gold is stored in a vault in London and insured by Lloyd's, and since accounts are linked to the U.S. automated clearinghouse, GoldMoney can easily be converted to dollars and wired to any bank. Thanks to efficiencies of the Internet, GoldMoney's exchange rate is just 2 percent over the spot price of gold--far below the markup on, say, gold coins bought through a broker. "Our goal is to bring gold down to the individual," says Turk, 58.

Less risk
Turk and his customers argue that other ways to invest in gold--such as exchange-traded funds (ETFs) and brokerages--are too risky or too costly. In the case of an ETF, for instance, investors hold paper whose value depends on the smooth, honest operations of traditional exchanges. Says Mark Kohr, who recently sold his house in Venice, Calif., and began pouring his profit into GoldMoney, "I don't want to sound like a fruitcake, but the appeal of GoldMoney is that it's outside of the system."

For centuries, of course, gold was the system, the standard underlying much of global commerce. But in more modern times, it lost luster, particularly after President Franklin D. Roosevelt signed legislation making it illegal for individual Americans to own gold coins, bullion, and certificates. That law was rescinded in 1974. Gold prices soared in the inflation-ridden late 1970s but then slumped and stagnated. The metal traded around $250 an ounce in 1999 and has for decades been a lousy long-term investment.

Nevertheless, Turk maintains that gold is like insurance, shielding wealth from global economic calamity. In fact, he and other goldbugs see the recent run-up in gold's price as almost beside the point. In the long term, they say, governments are too quick to print money, which spurs inflation and destroys buying power. "There are too many political factors that can wreck a currency," Turk says. "You have to do what lets you sleep at night." If you think the country is about to collapse, you might as well profit from it.
 
One previous M&M blog article suggested the ETF could remove 25% of available silver from the market. I've read elsewhere that Barclay's ETF proposal could effectively empty the COMEX warehouses. Can you imagine the effect that would have?

Unlike gold, there are important industries that depend on this stuff. What would happen if suddenly 25% of the world's above-ground oil stockpiles suddenly disappeared?

Finally, silver is rarer than gold. Most of the gold ever mined is still around, whereas the silver keeps getting used.

Is it any wonder all the billionaires have maxed out on this stuff and stored it overseas? If the Feds ever confiscate PMs again, they'll start with silver.
 
Finally, silver is rarer than gold. Most of the gold ever mined is still around, whereas the silver keeps getting used.

This is not true. Nearly 40% of the silver produced is used for jewelry, tableware, coinage, etc. Silver production is seven to eight times that of gold, and the overall production of silver from the dawn of man is about ten times more than gold. There is a lot of the stuff laying around--a lot more than gold.

I think the price ratio of the two metals is a load of crap. The supply and demand for the two are what they are, and the two have little relation.

The ETF buying up part of the supply could cause a serious price distortion. You have to take into account that the market discounts the future. Some of the recent price rise is undoubtedly due to expectations about the ETF.
 
Technically speaking, yes, all of the silver (just like all of the gold) is still around. None of any metal truly disappears.

However, the amount of readily available silver bullion is a fraction of that for gold.

It's like water -- the world is covered in it, yet paradoxically there simply isn't enough of it (at least, not in the right places). Sounds ridiculous until you qualify it by saying "drinking" water.
 
Another point...

The rise of silver is still basically in line with gains in other PMs in general, going back several years. If the ETF is having an effect, why isn't silver seriously outpacing the others?
 
Gotta ask... what exactly does "amadablamdream" stand for?

"tj & the bear" -- obviously a play on the old TV show -- is my optimistic self (TJ's my real nickname) and my extremely bearish alter ego (which only manifested itself recently).
 
Speaking of water, some are saying that is the next hot commodity investment. I've got my eye on a couple of water utility companies that also happen to pay a 5-6% yield.
 
on the marketocracy.com website I set up a water stock fund a few months ago. it's doing not bad.

I think the gold/silver ratios are very important. gold and silver, as a monetary unit, are basically the same. if you see during the 70s, silver outperformed gold AND the gold/silver ratio topped out at about 15. since 2001 silver has gained 142% while gold has gained 124%.
 
15 Fundamental Reasons to Own Gold


by John Embry

1. Global Currency Debasement:

The US dollar is fundamentally & technically very weak and should fall dramatically. However, other countries are very reluctant to see their currencies appreciate and are resisting the fall of the US dollar. Thus, we are in the early stages of a massive global currency debasement which will see tangibles, and most particularly gold, rise significantly in price.

2. Investment Demand for Gold is Accelerating:

When the crowd recognizes what is unfolding, they will seek an alternative to paper currencies and financial assets and this will create an enormous investment demand for gold. To facilitate this demand, a number of new vehicles like Central Gold Trust and gold Exchange Traded Funds (Elf's) are being created.

3. Alarming Financial Deterioration in the US:

In the space of two years, the federal government budget surplus has been transformed into a yawning deficit, which will persist as far as the eye can see. At the same time, the current account deficit has reached levels which have portended currency collapse in virtually every other instance in history.

4. Negative Real Interest Rates in Reserve Currency (US dollar):

To combat the deteriorating financial conditions in the US, interest rates have been dropped to rock bottom levels, real interest rates are now negative and, according to statements from the Fed spokesmen, are expected to remain so for some time. There has been a very strong historical relationship between negative real interest rates and stronger gold prices.

5. Dramatic Increases in Money Supply in the US and Other Nations:

US authorities are terrified about the prospects for deflation given the unprecedented debt burden at all levels of society in the US. Fed Governor Ben Bernanke is on record as saying the Fed has a printing press and will use it to combat deflation if necessary. Other nations are following in the US's footsteps and global money supply is accelerating. This is very gold friendly.

6. Existence of a Huge and Growing Gap between Mine Supply and Traditional Demand:

Gold mine supply is roughly 2500 tonnes per annum and traditional demand (jewellery, industrial users, etc.) has exceeded this by a considerable margin for a number of years. Some of this gap has been filled by recycled scrap but central bank gold has been the primary source of above-ground supply.

7. Mine Supply is Anticipated to Decline in the next Three to Four Years:

Even if traditional demand continues to erode due to ongoing worldwide economic weakness, the supply-demand imbalance is expected to persist due to a decline in mine supply. Mine supply will contract in the next several years, irrespective of gold prices, due to a dearth of exploration in the post Bre-X era, a shift away from high grading which was necessary for survival in the sub-economic gold price environment of the past five years and the natural exhaustion of existing mines.

8. Large Short Positions:

To fill the gap between mine supply and demand, central bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tonnes (30- 50% of all central bank gold) is currently in the market. This is owed to the central banks by the bullion banks, which are the counter party in the transactions.

9. Low Interest Rates Discourage Hedging:

Rates are low and falling. With low rates, there isn't sufficient contango to create higher prices in the out years. Thus there is little incentive to hedge, and gold producers are not only not hedging, they are reducing their existing hedge positions, thus removing gold from the market.

10. Rising Gold Prices and Low Interest Rates Discourage Financial Speculation on the Short Side:

When gold prices were continuously falling and financial speculators could access central bank gold at a minimal leasing rate (0.5 - 1% per annum), sell it and reinvest the proceeds in a high yielding bond or Treasury bill, the trade was viewed as a lay up. Everyone did it and now there are numerous stale short positions. However, these trades now make no sense with a rising gold price and declining interest rates.

11. The Central Banks are Nearing an Inflection Point when they will be Reluctant to Provide more Gold to the Market:

The central banks have supplied too much already via the leasing mechanism. In addition, Far Eastern central banks who are accumulating enormous quantities of US dollars are rumored to be buyers of gold to diversify away from the US dollar.

12. Gold is Increasing in Popularity:

Gold is seen in a much more positive light in countries beginning to come to the forefront on the world scene. Prominent developing countries such as China, India and Russia have been accumulating gold. In fact, China with its 1.3 billion people recently established a National Gold Exchange and relaxed control over the asset. Demand in China is expected to rise sharply and could reach 500 tonnes in the next few years.

13. Gold as Money is Gaining Credence:

Islamic nations are investigating a currency backed by gold (the Gold Dinar), the new President of Argentina proposed, during his campaign, a gold backed peso as an antidote for the financial catastrophe which his country has experienced and Russia is talking about a fully convertible currency with gold backing.

14. Rising Geopolitical Tensions:

The deteriorating conditions in the Middle East, the US occupation of Iraq, the nuclear ambitions of North Korea and the growing conflict between the US and China due to China's refusal to allow its currency to appreciate against the US dollar headline the geopolitical issues, which could explode at anytime. A fearful public has a tendency to gravitate towards gold.

15. Limited Size of the Total Gold Market Provides Tremendous Leverage:

All the physical gold in existence is worth somewhat more than $1 trillion US dollars while the value of all the publicly traded gold companies in the world is less than $100 billion US dollars. When the fundamentals ultimately encourage a strong flow of capital towards gold and gold equities, the trillions upon trillions worth of paper money could propel both to unfathomably high levels.

John Embry
Sprott Asset Management Inc.
Toronto, Canada
 
The average crustal weight ratio Ag/Au is ~17.5, using Mason's numbers from his classic geochemical text. Similar numbers are obtained from the values tabulated by Turekian and Wedepohl in their 1961 paper on average elemental abundances in different rock types.

So, if both elements are in demand and have similar extraction costs, their prices should approach that fundamental ratio. They have similar chemical properties (are "geochemically coherent", as we say), so they tend to get concentrated in similar ways, in similar geochemical settings, and they respond similarly to many of the same extractive reagents (cyanide in particular). Hence the technological factors are similar in their extractive costs.

Therefore, there is a fundamental reason that ratios around 16:1 were used for relative values of Ag vs. Au--that truly reflects, roughly, their relative abundance in the Earth's crust. Certainly that's what you'll get if both metals are viewed as "money" and you're averaging over many different sources of supply. The wide disparities in relative value that have occurred at various times reflect (a) sudden new sources of supply of one metal or the other (e.g., Ag from the Comstock Lode; cf. "the crime of '73"); (b) waxing and waning of different demands (e.g., silver halide photography); and (c) demonetization of both metals in the 20th century.

Certainly, if silver has more "industrial" value than gold, as has been claimed, its fundamentals look very promising for a rise in price. Furthermore, if both metals are undergoing a remonetization there's little doubt that their ratio of value will tend back to that of their average abundances. (Barring, say, commercial transmutation, which is not going to be an issue any time soon.)
 
Excellent post, iron56. Very informative!
 
Encompassed above, but have read sevral sites about the metals being shorted
" Strong evidence suggests that between 10,000 and 16,000 tonnes (30- 50% of all central bank gold) is currently in the market."

I'm sure most here have read the article where appreciably more of Silver is traded on the Comex than is currently physically held.
Read another yesterday where a Saudi
firm had bought several 100K ozs, and when asked for delivery the English firm was unable to deliver. They ended up settling their account, and were in the process of aquiring physical metal from other sources. As far as the historical ratio I was to understand that it only broke down within the last 20 years...Reagardless, I don't think there is any debate that we are running a deficit of silver, and it is increasing. What would you load up on, dollars?..that Bernanke can print at will, or a finite resource?
---

2 years ago read about German firms buying up all the small water utilities in the mid-west. Seems again, to be a safe bet that that will be an ever increasing necessity...

No doubts friends.. $10 Silver will look like $15/barrel oil in a few words. You have my personal guarantee for what it's worth...
 
As an aside...Say the ratio is correct ,and snaps back?

$570/16 = $35.62


Hmmmm
 
If the ratio "snaps" back.. I'm going to Disney World and sending Ben some Omaha Steaks.
 
up 3X is good, but not really good, austin.
 
Good would pay my bills this year. What's really good to you and when? I might need to get back on Apmex tomorrow.

P.S. If a cartoon of the prophet with a bomb in his turbin causes this kind of mayhem, what the heck will a few missles over Tehran do?
 
(Good would pay my bills this year. What's really good to you and when? I might need to get back on Apmex tomorrow.)

long term bull markets- similar to the DOW rise from the early 80s of 1000 to 12,000.
 
This comment has been removed by a blog administrator.
 
The Gold market is CRAZY these past few weeks days I tell ya. Gold has completely de-coupled from the USD and is now tied to oil IMO.

Gold is up $5 in Hong Kong on the 24 hour spot as I type this. Iran on Saturday gave a big F -You to the the world and is set to begin enriching uranium. I'm Sorry, again, to have sold GLD on Friday (I'll be back mon. AM) but look for the price of oil to jump $2-$3 a barrel come monday. It's gonna be a crazy ride tommorow
 
I'm not saying we'll get there soon, or ever, but what if gold gets back to it's inflation adjusted 1980 high of about $2300? that implies a silver price at the ratio of $153/ounce. that's more than 10X where we are now.
 
john law:

I do not doubt gold has the chance to reach the inflation adjusted 1980 high.

The main problem I see is for that to happen, the wotld wil be in a serious state of disaary. We're talking about some major economies crashing, the US fighting wars on multiple fronts, gasoline at $6.00 gallon, the USD tanking, and worst of all, a nuclear bomb being detonated somewhere.

I'd much rather have Gold appreciate at a steady 10% rate the next few years than to deal with all that bullshit.
 
thejdog,

I'm not sure it has to really get that bad. Once the housing bubble tanks, people will have been burned first by stocks and then by real estate. Gold & silver will look like the only truly "safe" investment in an ever more unsafe world... and then the race is really afoot!
 
Guys! Don't become overoptimistic.
I think of POG go to 200dma first than go much higher. $450-475.
That would hold up silver marching up. Lets be careful for now.
 
Gotta ask... what exactly does "amadablamdream" stand for?


Ama Dablam is one of the most beautiful mountains in the Himalaya. It's Nepal's equivalent of the Matterhorn.
 
The average crustal weight ratio Ag/Au is ~17.5, using Mason's numbers from his classic geochemical text.

And the average crustal abundance of platinum is slightly greater than that of gold, yet Pt trades at nearly double the price of Au.

If we ever get to the point where we have to extract elements from random rock or sea water, then the general crustal abundance would become important, but for now we extract metals from rock that has higher concentrations. The cost to produce a metal only depends on its crustal abundance as far as how that crustal abundance is related to how common ore is that can be economically mined.

Despite the crustal abundance of either metal, the actual production ratio is around seven or eight. The ratio of all silver and gold mined in history is about ten.

So, if both elements are in demand and have similar extraction costs, their prices should approach that fundamental ratio.

No, they should not. Even if they had the same demand (which they do not) the price ratio will not match the ratio of abundance (or even production) because demand curves are not linear. Doubling the supply of a good does not mean the price will be halved.

What silver has going for it is that because of the current price and supply relative to gold, a given amount of money poured into silver investments will have a greater effect on the price of silver than a similar amount of money poured into gold investments will have on the price of gold. In a precious metal bubble, silver should outperform gold if investors have an easy method of silver investment and they accept silver investment as a substitute for or equivalent of gold invesment.

It looks promising to me.
 
And the average crustal abundance of platinum is slightly greater than that of gold, yet Pt trades at nearly double the price of Au.

If we ever get to the point where we have to extract elements from random rock or sea water, then the general crustal abundance would become important, but for now we extract metals from rock that has higher concentrations. The cost to produce a metal only depends on its crustal abundance as far as how that crustal abundance is related to how common ore is that can be economically mined.


This is why I emphasized that Ag and Au are geochemically coherent. What concentrates one, as a rule, concentrates the other also. Ag has more affinity for sulfur whereas Au has more tendency to occur native--i.e., in the elemental state. This can cause some deposits to be significantly enriched in one or the other. It’s also why you get more byproduct silver than gold from sulfide ores of base metals. Nonetheless, all gold mines produce some silver, and conversely. The Comstock Lode was discovered on the basis of its gold content! Modern cyanide leaches are optimized for gold instead of silver, for obvious reasons, but silver is extracted too.

Platinum has significantly different chemistry and is not relevant.

Even if they had the same demand (which they do not) the price ratio will not match the ratio of abundance (or even production) because demand curves are not linear. Doubling the supply of a good does not mean the price will be halved.

Depends on the good. Electricity is often used as the example of an “infinitely elastic” commodity--in fact, halving the cost of electricity does roughly double its consumption.

But historically, this is not relevant because you’re dealing with intrinsically rare commodities that were used as money. If there’s 16 times as much of one as another, it’s going to be worth 16 times less. Gresham’s theorem, you know.

As I previously had mentioned, the decoupling of the ratio has a great deal to do with the demonetization of both metals, along with their different industrial demands.
 
(As I previously had mentioned, the decoupling of the ratio has a great deal to do with the demonetization of both metals, along with their different industrial demands.)

and where we are in the cycle. remember, silver is cheap in part because it's a mining byproduct. I believe most silver is mined looking for other metals. why they sell silver so cheaply I don't know, but apparently they just want to get rid of it. that's part of the reason why the price got so low.
 
OK, so I'm a novice metal trader and I've only just learned about GLD and IAU. What do I have to do to trade Silver? Someone mentioned silver certificates?
 
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