The gold to silver ratio, which is a measure used by many precious metals investors to determine the relative value of the metals, has been used for years.  In fact, the relative value of the two metals can be traced all the way back to Roman times, during which time the ratio fluctuated between 12 to 1 and 12.5 to 1.  Shortly after the United States gained its independence from Great Britain, a fixed gold to silver ratio of 15 to 1 was passed into law.  While the price of gold remained fixed in the U.S. until Nixon severed ties to the gold standard in 1971, the gold to silver ratio continued to fluctuate during this time, as the price of silver was, and still is today, determined in the commodities market.  While the gold to silver ratio hasn’t been as low as 17 to 1 since 1980, many investors believe that we will eventually see a return to this ratio, or possibly even lower, and are investing accordingly.  In this article, we’ll explore if the gold to silver ratios from 1792 and 1980 are relevant today and if investors should rely on these ratios when investing in precious metals.  

1980

When silver investors make reference to historical gold to silver ratios ranging from 15 to 1 to 17 to 1, they oftentimes point to 1980, when for a brief period of time the ratio was 17 to 1.  More specifically, gold and silver reached levels of $850 and $50, respectively.  However, what many individuals fail to realize is that the silver market at that time was being manipulated by the Hunt Brothers.  They sought to corner the silver market and in doing so, caused the price of silver to skyrocket up to $50 an ounce.  COMEX responded by changing their margin requirements.  Furthermore, the Federal Reserve increased interest rates in an attempt to choke off inflation, which caused the price of silver to subsequently spiral to $4.98 an ounce thirty months later, which was just 10% of the peak reached in 1980.  Considering that the price of silver was being manipulated in 1980, we don’t believe that the gold to silver ratio of 17 to 1 briefly reached in 1980 is a good benchmark.  Rather, investors should pay more attention to average ratios established over a period of time, such as the 47 to 1 ratio experienced in the 20^th century.  Another good benchmark to consider is the 31 to 1 ratio we reached in April of 2011 when silver peaked at $50 an ounce.  In this author’s opinion, these ratios are more relevant than the ratios established in 1792 or those briefly reached in 1980.

Supply/Demand

As with any other commodity, the price of gold and silver is determined by supply and demand.  According to this piece from Zerohedge.com, gold to silver production is approximately 10.7 to 1.  Furthermore, due to the fact that silver is utilized quite extensively for industrial purposes, almost half of all silver ever mined has been used or lost.  Considering that most gold mined throughout history is still in existence, the current ratio of available silver to gold is ~ 5 to 1.  Based on the available supply of silver, you would expect for the gold to silver ratio to be much closer to the fixed ratio established in 1792 or briefly seen in 1980; however, it’s important to remember that the price of gold and silver is determined by different factors, which we’ll discuss next.

Factors Affecting the Price of Gold & Silver

While a record number of American silver eagles were sold in 2013, at slightly less than 43 million ounces, the fact remains that investment demand for silver is much less than for gold.  According to the following article from Goldnews.com, investment demand for silver in 2012 accounted for approximately 15% of the use of silver compared to 44% for industrial uses.  On the other end of the spectrum, approximately 40% of gold is used for investment purposes and only 10% for industrial uses.  Not surprisingly, jewelry accounts for approximately 50% of the use of gold. Another factor affecting the price of gold is demand by Central Banks, who have been net buyers of gold over the past couple of years.  This has helped to establish an artificial floor in the price of gold, as Central Banks tend to buy on the dips. Central Banks, at least at the time of this article, do not purchase and store silver.  Because different factors affect the price of gold and silver, they won’t necessarily move in tandem, nor is there a known catalyst that will substantially shrink the ratio.  Unless investment demand for silver dramatically increases from its current levels, we experience high levels of inflation, or see a huge increase in the demand of silver for industrial purposes, we would expect for there to be a healthy spread in the price of the two metals, which at the time of this writing is approximately 66 to 1.

Summary

While many investors often refer to the “historical” gold to silver ratio of 16 to 1, the fact is that the U.S. has not had a fixed gold to silver ratio for many years.  Furthermore, the last time the gold to silver ratio reached these levels was in 1980, which shouldn’t be used as a benchmark, as the silver market was being manipulated by the Hunt Brothers at that time.  For two metals to remain at consistent ratios there must be a relatively constant supply and demand.  While silver is consistently produced at levels approximately eleven times that of gold, demand and use of the two metals varies quite substantially.  Unless investment demand for silver substantially increases from its current levels or if we experience economic conditions that are bullish for silver, we expect for the historical ratios of gold and silver to remain just that; a thing of the past.  In other words, don’t necessarily rely on historical ratios when determining when to purchase gold or silver.

About the Author

Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer.