March 5

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The Gold-Silver Ratio Explained

Ilir Salihi

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The gold/silver ratio can be considered the primary gauge of measuring whether either of the two metals is overpriced or underpriced. It refers to how many ounces of silver are required to buy one ounce of gold. For example, in medieval times the ratio stood at 15:1, requiring 15 silver ounces for an ounce of gold.

Importantly, there is no fixed ratio, and this gauge deals mostly in relative prices. That being said, the measure has done some pretty crazy things since then, and it's generally agreed that a ratio of around 40:1 is accurate. Any instance in modern history where the ratio exceeded this significantly was followed by a major correction in the form of silver gains.

It now stands around its highest levels in a while, making many expect a silver breakout in the near future. Of course, there are some dividing opinions, and we'll try to address those as well. Based on historical precedent alone, though, gains for silver do seem to be in the books.

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What is the Gold/Silver Ratio Now?

Right now, the gold/silver ratio sits at 88. This is a historically high figure and, by all accounts, demands a correction. However, there are some things to note when considering how the correction itself should look like.

When the ratio shot up to over 125 around three years ago, practically everyone screamed "silver bull run". The gold/silver ratio had already lingered around 80 for a long time, giving a kind of base to these forecasts. When it got to 125 and above, it seemed that some kind of silver price reimagining was in the works.

Three years later, what does the situation look like? As mentioned, the gold to silver ratio is almost 90, a very high figure. It might be more precise to say that we are in a kind of silver bear market, as this askew of a ratio has only been present three times over the past century. And each of those times didn't last long.

But how have gold and silver prices moved over these few years? Despite having "normalized" down from 125 all the way to 88, silver actually hasn't gained. It remains at historic lows not just relative to gold, but in general, sitting around $22.

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Is Silver Underpriced Right Now?

Indeed, many silver bugs won't want to tell you that silver's current price of around $22 represents a historic low of modern era, meaning that the metal is even failing to track inflation. It had shot up to $50 decades ago, to give you an idea of just how badly it's performing. If gold right now sat at half the price it did almost 50 years ago, it would be hard to sell it as a store of wealth.

Silver bullion remains a popular purchase. Sentiment obviously has to do with this, tying into the traditional association of silver coins with money. To most who invest in silver, it is still money, so long as prices remain kind of elevated compared to... well, nickel.

Precisely because of how it has fared not just against gold but also other assets is why many believe silver is underpriced. If it was only the gold/silver ratio that was askew, we could chalk it up to an inaccurate gauge. 

But as we all know, inflation is there to erode the purchasing power of currencies. Prices of everything have increased over the past few decades. Silver prices, for a supposed inflation hedge, haven't moved by much in comparison. This makes forecasts right now shakier than they seem to silver bulls.

Is Gold Overpriced Right Now?

If it's not silver that's making the gold/silver ratio askew, you might think it's gold instead that is overvalued. Most recently going between $1,800 and $1,900, the general consensus is that gold isn't overvalued. Recent bearish forecasts have placed support above $1,700 and many expect a year-end target of $2,000.

That means gold is probably going to go up even more in price, thereby further increasing the ratio. After all, that's what happened three years ago. Silver hit multi-year highs as gold hit its own new ATH above $2,000, and it's often said that silver not only tracks the yellow metal but has more volatility. This is taken to mean that it has upside volatility, but in this case, it meant the opposite.

Gold has remained relatively elevated, near its ATHs, and with the highest inflation we've seen in decades, it isn't likely to go down by any significant margin. This is especially true considering gold invariably trends upwards over the long term. Yet silver's long-term chart is a much more complex one.

So, the gold price is right according to most, which has to mean that silver is underpriced, and to some extent. Nonetheless, the agreement that it will be the gold/silver ratio that causes a breakout in silver isn't uniform. Some actually consider this gauge irrelevant, which is pretty strange considering its general accuracy throughout history.

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What Would a Normal Gold/Silver Ratio Look Like?

Over the past century, the gold/silver ratio has oscillated a lot. Again, it passed 80 only in three instances. The agreement is that it should be lower. But by how much?

In the 1920s, the gold/silver ratio was below 40. It climbed almost to 100 in the coming decades, fell below 40 again by the 1950s, and then started having an upwards trend when the gold standard was abandoned in 1971.

We can interpret this chart in several ways. Those who insist on sound money will say that the ratio should be around 40, which is a fair point and certainly in line with historical valuations of the two precious metals.

Those with a more modern economic outlook will point to a range between 80 and 60, as that is where the ratio sat from the late 1990s until the recent surge.

There is yet another interpretation: just as the gold/silver ratio seemed to naturally increase from 40 to 80 between the 1920s and the 2000s, it might be naturally increasing now to a range of 80 to 120 and above. 

This is the interpretation that any silver investor wants to hear the least, yet it's one we must consider nonetheless. Gold, while certainly safer than other precious metals, is often cited as being highly volatile. In line with this, silver "acting weird" is less weird than it might seem.

If we agree that the ratio should be at 40, then the price of silver right now should be above $40 an ounce. That doesn't seem lofty, really, but just based on how long it's been since we've had such a ratio, it seems unrealistic. Perhaps a tell about the relative near future of silver prices?

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What Can We Expect From Silver in the Near and Long Term?

Silver's price action has been disappointing as of late, that much is clear. Silver reached $48 in the 1970s due to what was essentially a Ponzi scheme, but then climbed to $48 again naturally in 2011, following gold's $1,910 ATH back then.

Both metals dropped, but as we've seen, physical gold has since returned to that high on inflation alone. Silver, for some reason, remains at $22 an ounce.

$24 an ounce is seen like a gain these days. Considering the general uptrend of the gold/silver ratio over the past decade, one might have to concede that a higher gold/silver ratio is here to stay.

That doesn't necessarily have to mean low silver prices. Silver could double from current valuations, but for that to happen, gold would have to double from its own. It's not exactly an unrealistic scenario, but it's one that makes us re-evaluate how we approach the pricing of both metals.

Both are very popular among investors and both have spot prices that are disconnected from investment demand. So saying that silver seems to have fallen out of favor compared to gold isn't exactly true. Many gold companies are thriving in today's market, with plenty buyers for both metals. It might be more accurate to say it's fallen out of favor among traders.

To be clear, silver is a highly speculative trade on the bullish side. Those who are making big bets on silver consider it immensely undervalued and suppressed.

There are several grassroots movements lobbying for higher silver prices based on claims of suppression. Some claim that silver should be priced at hundreds of dollars an ounce. 

To make a moderate forecast on a highly volatile metal, we can go and say that silver should be priced a little higher. $22 indeed seems too low, and a price range of around $40 seems accurate. However, the charts have made it very clear that that is a long way to go for the second most popular precious metal. 

It might be correct to say that gold will have to double in price for that to happen. Or, silver might surprise everyone with an "I told you so" and blaze past that level irrespective of gold's gains. That's what makes it such an exciting investment.

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About the Author

Ilir writes about personal finance, entrepreneurship, and digital marketing. When he's not creating content online, he's spending time with his family in Washington, DC.

Ilir Salihi


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