The Silver-Gold Ratio Is Still Way Out of Whack

The silver-gold ratio has ticked back up to historically high levels of late.

As I write this article, the ratio stands at just over 88:1. That means it takes 88 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.

Last summer, the ratio climbed to nearly 93:1 as gold rallied. Silver closed the gap in the fall and the ratio dropped into the low 80s’ to one. But in recent weeks, we’ve seen the gap widening once again.

In 2019, the silver-gold ratio averaged 86:1. That ranks in the top 2% all-time, dating back to 1687. Only two years in the era since the US government unpegged the dollar from gold have seen higher ratios – 1991 and 1992.

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

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.

But as Peter Schiff has explained, the Federal Reserve fooled everybody into believing low interest rates and quantitative easing were temporary – that they were emergency fixes. The mainstream expected the Fed would eventually raise interest rates and shrink the balance sheet. But it’s become clear that wasn’t the case. Extreme monetary policy is the new normal.

Peter has said that when the mainstream figures this out, gold will go through the roof. If that’s the case, silver will almost certainly go up with it. 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

Furthermore, it may well mean the silver-gold ratio will shrink again as it did in the years after the ’08 crash. Historically, during a bull market in gold, silver outperforms. If this holds trues, that ratio will close.

As commodities analyst Jason Hamlin said in an article published by Seeking Alpha, “The gold-silver ratio has been one of the most reliable technical ‘buy’ indicators for silver, whenever the ratio climbs above 80.”

The silver-gold ratio has been out of whack for quite a while now, but investors still aren’t buying. Of course, the mainstream, by-and-large, isn’t buying gold either. They still seem convinced that the Fed can keep the air in the stock market bubble.

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.”