Should Silver Be $144? A Look at Gold to Silver Ratios

There are three reasons why silver is considered a good precious metals investment:

  • It has industrial value. Silver is vital to more than 30,000 applications across 10,000 industries, from smartphones to solar energy.
  • Along with gold, it has a long history of value as currency worldwide. Our ancestors dating back to ancient times knew the value of silver as a metal that did not rust, did not melt at normal temperatures, and could be easily minted and traded.
  • Also like gold, silver is rare enough to be valuable, but not so rare it’s unobtainable.

It’s this last point that needs digging into. How does the rarity of silver factor into its value, especially when compared to gold?

Is gold or silver more rare? How does that affect price ratios?

The ratio of silver to gold in the Earth’s crust is estimated at 17.5:1. In theory, this means the price ratio of gold to silver should be about 18:1—meaning one ounce of gold would be worth 18 ounces of silver.

The reason gold costs more is because it’s more rare, right?

Let’s look at a different number. The current mining production ratio of silver to gold is about 9:1, meaning that 9 ounces of silver are mined for every one ounce of gold. That’s a more relevant number than the 17.5:1 ratio, because all that gold and silver isn’t doing much good if it’s just sitting in the ground.

Silver miner with nugget

In theory that should mean a gold to silver price ratio of 9:1. That would put the price of silver at $144 relative to the current price of gold.

No, we’re not saying silver is going to shoot up to $144. Theory and reality rarely match. What we’re saying is that something is off about the price ratios.

See, the price ratio isn’t 9:1 or even 18:1. Not even close…

In December 2018, the gold to silver price ratio was 82:1. That’s a 27 year high.

In ancient times, the price ratio was generally in the range of 15:1. Ancient Rome fixed the gold/silver price ratio at 12:1. In our own United States circa 1792, the gold/silver price ratio was fixed by law at 15:1 (of course that’s no longer the case).

That all started to change in the 20th century, when the average gold/silver ratio was 47:1. Over the past 20 years, it’s averaged 60:1.

Even by those standards 82:1 is astronomically high.

What’s going on? If mined gold is only about 9 times rarer than mined silver, why does it cost 82 times more?

Silver supply and demand

This would all make sense if there wasn’t a demand for silver…but that’s not true.

Demand for silver hit a record high in 2015, and while it has cooled down on the bullion side since then (not the industrial side) global demand for silver still outpaces the mining and existing supply. American Silver Eagles sold out again last year (but no, you shouldn’t panic about that, no matter what some high-pressure precious metals dealer tries to tell you).

So if there’s demand for silver, what’s with the insane discrepancy between the gold/silver supply and price ratios? Why is silver so undervalued relative to gold at this time?

There are no definitive answers to those questions. But here’s what it could mean for silver investors…

$144 silver? Probably not. $26 silver? Very likely.

Coin Stacks B1Commodity prices tend to move dramatically when the market wises up to serious supply/demand mismatches, as it appears we have with silver. This suggests that silver should increase in price relative to gold to close the enormous gap in the price ratio.

Again, we’re not saying $144 silver is realistic. But there are credible reasons to believe the gap should close to be more in line with historic averages. At the U.S. historical average of 50:1, that would imply a silver price of $25.93 based on a gold price of $1296.58.

Contact West Hills Capital

The gold to silver ratio is an important trading signal that can help to identify buying or selling opportunities in the precious metals sector. Speak with one of our metals strategists to learn more about the different precious metals products on the market and which might be best suited to help you achieve your investment goals. Contact us at (800) 867-6768 today.