Silver at a Discount: Silver-Gold Ratio Hits 2-Year High
The silver-gold ratio hit a two-year high this week, indicating that silver is significantly undervalued compared to gold.
The silver-gold ratio is currently just over 90-1. That means it takes just over 90 ounces of silver to buy an ounce of gold. To put that into perspective, the average in the modern era has been between 40:1 and 50:1.
In simple terms, historically, silver is extremely underpriced compared to gold. At some point, you should expect that gap to close.
In the summer of 2019, the sliver-gold ratio climbed to nearly 93:1 and at the onset of the pandemic, it rocketed to over 100:1. But as the Fed slashed rates and launched its massive quantitative easing program, gold rallied and took silver with it. Silver typically outperforms gold during a gold bull run. This was the case during the pandemic. As gold pushed above $2,000 an ounce, a 39% gain, silver rallied to nearly $30 an ounce, a 147% increase.
Meanwhile, the silver-gold ratio fell from over 100:1 to just over 64:1, close to the high end of the historical norm.
With that spread widening again, we could be setting up for another big rally in silver.
Here’s some historical perspective.
Geologists estimate that there are approximately 19 ounces of silver for every ounce of gold in the earth’s crust, with a ratio of approximately 11.2 ounces of silver to each ounce of gold that has ever been mined. Interestingly, the silver-gold ratio in ancient Egypt was 1:1.
In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1. France mandated a ratio of 15.5:1 in 1803. Faced with the challenges of a bi-metallic monetary system with fixed exchange rates and the aftermath of a worldwide financial crisis, the US Congress passed the Coinage Act of 1873. Following the lead of other Western nations, including England, Portugal, Canada, and Germany, this act formally demonetized silver and established a gold standard for the United States.
With silver playing a smaller role as a monetary metal, the silver-gold ratio gradually spread.
Since the world went to a total fiat money system, there seems to be some correlation between the silver-gold ratio and central bank money creation. During periods of central bank money-printing, the gap tends to shink. In fact, it plummeted in the aftermath of the 2008 financial crisis as the Fed engaged in extreme monetary policy.
Currently, most analysts believe the Fed will continue its war against inflation and monetary policy will continue to tighten. As a result, gold and silver have both seen significant selling pressure despite an extreme inflationary environment and a lot of evidence that the economy is tanking.
The big question is whether the Fed will keep tightening even as it becomes more apparent we’re in a recession? Historically, the Fed has been quick to rush in an prop up a lagging economy. Rate cuts and a return to QE would almost certainly pour more gasoline on the inflation fire.
Eventually, the markets will figure this out, and gold and silver should rally.
The supply and demand dynamics also look good for silver even with a looming recession. Investment demand skyrocketed last year and supply is down. Industrial demand is rising driven by the growth of the green energy sector. Governments are likely to keep that gravy train running even during an economic downturn. Mine output was hit hard by shutdowns due to the coronavirus pandemic, but silver production was already on the decline with mine output dropping for four straight years.
Now may be the perfect time to take advantage of silver on sale.