The Gold-to-Silver Ratio: Where Should it Be?

In a recent knowledge center article, we defined the gold-to-silver ratio as the amount of silver it takes to buy one ounce of gold.

As of midday Thursday, Jan. 9, 2014, the gold:silver ratio stood at 62.88 to one. This means that at current price levels, it takes nearly 63 ounces of silver to purchase a single ounce of gold.

Over the 20th Century — and even the last decade — this ratio fluctuated wildly. During the big peak of 1980, the ratio was at its pre-1900 historical average of 16:1. In the early 90s, it stood at 100:1.

When silver peaked at $49.50 in April 2011, the ratio had dropped to 32:1. In the nearly three years since the peak, it has drifted back to above 60.

When the ratio is higher, like it is now, many investors prefer silver, since this is a signal it’s at a bargain-price level. Conversely, as the ratio drifts lower, interest shifts to gold.

For example, when the ratio hit 32 in April 2011, more investors were liquidating their physical silver as opposed to buying it.

Where Has the Ratio Been — And Where Is It Going?

The honest answer to the question of where the gold-to-silver ratio should be is this: “We have no earthly idea.”

However, if we look at historical and geological data, and consider other factors like demand and inventory, we can make an educated guess.

For a few decades prior to 1900, the ratio was rather stationary at 16:1. Much of this was due to the fact that Europe and the United States were using a gold/silver backed currency and the ratio was set by decree or law.

Yet with the advent of the Federal Reserve and the subsequent end to gold and silver backed money, the ratio fluctuated wildly. Gold and silver prices fluctuated too, with silver’s swings more volatile in both the up and down directions.

In 2010 for example, gold went up 29.7 percent while silver rose an astounding 83.8 percent. In 2008 — which was a rough year for just about everything — gold rose 6.1 percent while silver shed 22.5!

(Like we said, where the ratio is headed is anybody’s guess, but we can look at data to get an idea.)

Forecasts on where the natural gold-to-silver ratio should be vary. Here are a few of the predictions we’ve seen:

• Approximately 9:1 – Some believe the ratio should be radically lower, and reflect the amount of production for each metal. In 2011, 2618 tons of gold and 23,688 tons of silver, which is roughly 9 times, were produced globally. If gold stayed constant at $1300, silver would need to rise to around $145/oz.

• Approximately 16:1 – Others believe the ratio should return closer to its pre-1900 historical average. Studies estimate the Earth’s silver supply is somewhere around 19 times more abundant than gold. Again, if gold were to stay at $1300, we’d see an increase in silver to around $80.

• Approximately 35:1 – another forecast from Patrick Heller, owner of Liberty Coin Service in Lansing, Michigan, predicts the gold:silver ratio will end at around 35-40 to 1. He points to 2011 when it hit 32:1 and many people started cashing in on their silver.

Besides silver being roughly 15-20 times more abundant than gold, another reason many analysts project a lower ratio is above-ground inventory. Unlike gold, silver is in high demand for industrial applications. As a result, there’s hardly any above-ground silver. Gold on the other hand has a pretty significant amount of above-ground inventory.

Also, many expect the ratio to go down, as both metals perform better. If history is any judge, future increases will be more significant for silver, which will push the ratio down.

For example, Citibank forecasts that in the next few years, we could see gold at $3500 per ounce. This equals $100 per ounce for silver in the high projection. At 16:1, $3500 gold means silver would need to be near $220!!

As we said earlier, projecting where the ratio should be is tricky. However, we can be certain that if the ratio goes down, those who bought silver bullion at current price levels will be much better off.

Tell Us Your Thoughts

Do you think the gold:silver ratio will continue rising, or will it return to its historical average?

Let us know in the comments section below, or connect with us on Facebook and Twitter.