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.
 
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.
 
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).
 
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%.
 
Excellent post, iron56. Very informative!
 
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.)

long term bull markets- similar to the DOW rise from the early 80s of 1000 to 12,000.
 
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.
 
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!
 
(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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