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Silver-Gold Ratio Hits Quarter-Century High

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The silver-gold ratio hit the highest level in over a quarter century this week.

The ratio hit to 86:1 as dollar strength pulled both the price of silver and gold lower this week after the Federal Reserve indicated it plans to keep pushing interest rates higher. The price of silver fell even more steeply than the gold price. A research note by Commerzbank said it was that largest gap between the two metals in 25 years. Practically speaking, this means silver is undervalued compared to gold.

And gold is undervalued in and of itself. As Peter Schiff pointed out in a video this week, gold is a mispriced asset. The so-called economic boom is a giant bubble and it looks like the air is already coming out. The Fed will almost certainly have to reverse its monetary policy in the near future.

This is not going to be the ‘third time’s the charm’ when it comes to the Fed and their monetary magic. It is, as I’ve been saying, three strikes you’re out. But if you want to avoid going down, you need to protect yourself. You need to preserve your wealth. You need to buy gold and silver, and you need to buy it now.”

Such a significant spread in the silver-gold ratio indicates silver maybe even more significantly undervalued.

Analysts say silver has been hit by spillover weakness in other industrial metals. For example, copper has lost more than 60 cents per pound since its summer peak. But the fundamentals actually look good for silver. The green energy revolution is expected to push industrial demand for the white metal up in the next 30 years.

This is the second time this year the silver-gold ratio has pushed to this level. It eclipsed 85 back in September. To find a higher silver-gold ratio, you have to go all the way back to 1991.

Historically, the silver-gold ratio has been much lower. 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.

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. The modern average over the last century is around 40:1.

Silver is much more volatile than gold due to its industrial role, but at its core, it is still a monetary metal and it tends to track relatively consistently with gold over time. When gold goes up, it almost always takes silver with it. When this dollar strength fades and inflation rears its ugly head, both metals will likely take off. At that point, history indicates silver will begin to close that gap with gold.

Silver has hit an all-time high of $49 per ounce twice – in January 1980 and then again in April 2011. If you adjust that $49 high for inflation, you’re looking at a price of around $150 per ounce. In other words, silver has a long way to run up. As one analyst put it, “With the long-term downside potential of silver very low versus its current valuation, the risk/reward is one of the best investments on the planet.”

Get Peter Schiff’s latest gold market analysis – click here for a free subscription to his exclusive monthly Gold Videocast.
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