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What’s Correct Gold/Silver Ratio?
By Patrick A. Heller
November 19, 2013

At what level is the long-term gold/silver ratio likely to settle? Will it end up at 15 or 16 to 1 such as established by many nations during the 1800s and early 1900s and again in January 1980? Will it exceed 100 as it did in the early 1990s, or will it remain around 60 as has happened for much of the past year?

The truthful answer is that no one knows, not even me. Although the daily prices of gold and silver tended to rise or fall in tandem about 70 percent of the time over the past several decades, they rarely move in tandem by the same percentage.

Silver has always been more volatile, both in strong and weak markets, than gold. In bull markets, silver soars while gold rises. In down markets, silver plummets to a much greater degree than gold.

As I write this about noon on Monday, for instance, the price of gold is down 23.5 percent year to date while silver has fallen 33.8 percent over the same time. If you go over the annual price changes from the end of 2001 to 2012, here’s how gold and silver compare:

In seven of the eight years where both prices rose, silver rose by a greater percentage.

From the end of 2001 through the end of 2012, the price of gold (not compounded) was up 480 percent. Even though the price of silver fell during three of the 11 years in this span, overall the price of silver rose 502 percent.

For several years, I have projected that the long-term gold/silver ratio will end up somewhere in the 35 to 40 range. This is higher than several other analysts project, though there are some who think the ratio will be even higher than I do. There is no magic statistical analysis for my prediction. Rather, it is an observation of how people react at different ratios.

With the ratio mostly above 50 over the past two years, the dollar volume of customer demand for physical silver has exceeded that of physical gold. In other words, more than 50 or 60 times as many ounces of silver are being bought compared to gold. Yet, when the ratio dropped to 32 at the end of April 2011, investors were liquidating more physical silver than they were buying.

There are three significant reasons why I expect the gold/silver ratio to decline in the next 24 months:

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1. I anticipate substantially higher prices for both metals in the next year or two. With silver being more volatile in price, it should increase by a greater percentage than gold, which would knock down the ratio.

2. The amount of newly mined silver supplies is only about 10 times more than gold. Stated differently, there is not enough silver coming out of the ground to provide 50 or 60 ounces of physical silver for every ounce of gold needed for investor and industrial purposes.

3. The price of silver has acted counterintuitively in 2013. Through several changes in taxes and import restrictions, India’s government has severely restricted the ability of the citizenry to acquire gold. As a consequence, demand for physical silver in India has soared over the past few months. The rise in demand is so strong that analyst Eric Sprott estimates that annual worldwide demand for physical silver in 2013 will be 17 percent higher than in 2012. Normally with such an increase in demand, you would expect rising prices. Yet, year-to-date, the price has fallen by one-third.

Don’t count on my forecast of a gold/silver ratio eventually settling in the range of 35 to 40. However, with ratio of more than 62, I think silver will outperform gold over the next couple of years. To be conservative, I still think gold should make up one-third to 40 percent of one’s combined investment in gold and silver, but I am definitely favoring the prospects for silver.

One last thought: the gold/silver ratio will never reach a long-term equilibrium. The availability of future supplies and demand will always keep changing. Even in a “stable” market, a swing of 10 points in either direction is likely to happen in the short-term.

 

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Other commentaries are available at “Coin Week." He also writes a bi-monthly column on collectibles for The Greater Lansing Business Monthly. His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing.


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Comments
On November 20, 2013 AK said
Good article.  One thing to consider is that as the prices of both metals rise, Gold will become increasingly unattainable to the average family that seeks to buy precious metals as protection.  So while the sovereign buyers and ultra-rich will accumulate Gold, the masses will more and more gravitate towards silver.  Industrial uses of silver are still increasing dramatically so I would expect that at some point you will see a tug of war between investors and industrial users.  Finally, the amount of investment grade silver above ground is only estimated to be around $30 billion globally.  That is a tiny fraction of the above ground Gold.  At some point I would think that this vast variance in potential supply should be reflected in a diminishing Gold to Silver ratio.

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