Breaking News

Thoughts On The Gold Silver Ratio

By David ChapmanCommoditiesSep 01, 2013 03:50AM ET
Thoughts On The Gold Silver Ratio
By David Chapman   |  Sep 01, 2013 03:50AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
Gold Silver Ratio - 1
Gold Silver Ratio - 1

The Gold/Silver ratio is currently just under 58:1. Many have cited that the Gold/Silver ratio should be roughly 16:1. This was an historic level that existed largely prior to 1900 during periods when both gold and silver were routinely fixed prices. The ratio as a result was largely fixed as well.

That was then but this is now. Since 1900, the Gold/Silver ratio has been far more volatile ranging as high as 100 to as low as 16/17 at the time of both gold and silver’s peak in January 1980. The ratio peaked once again over 100 in 1991 and since then has been on a downward trajectory hitting a low of 32 at the time of silver’s peak at $49.50 in late April 2011.

There are numerous arguments in the gold/silver community as to where the ratio should be. There are those that believe that ratio should go back to its historical level near 16. At today’s prices with gold at $1,400 silver would need to be about $90. According to studies silver is almost 19 times more abundant then gold. That would still put silver’s price close to $75. Finally, there are studies showing that the occurrence of silver in the ground is estimated at nine ounces of silver to one ounce of gold implying a silver price of $155. All of that gives off quite a range.

Given lower historical ratios it does seem baffling that the gold/silver ratio is today around 58 which is nowhere near the 9 to 19 range as suggested historically and in nature. The historical lower ratio suggests that buying silver today should be favoured over buying gold assuming a reversion to the mean.

Surprisingly, investment grade silver is rarer than gold. If investment demand were to rise for silver it could imply that the price of silver could soar compared to gold. Historically both gold and silver have not only intrinsic value but currency value as well. When investors flee to safety as was suggested with a potential for a military strike on Syria it is gold that is mentioned in the media and rarely silver. Silver, unlike gold seems to not be considered as a safe haven as is gold. Silver has considerable more industrial uses and unlike gold silver is used up whereas the supplies of gold remains largely above ground.

In 2011, global gold production was 2,618 tonnes. Global silver production was 23,688 tonnes. This fits nicely with the 9 to 1 silver to gold ratio that supposedly occurs in nature. Central banks, however, prefer to hold gold to silver. Annual demand supply deficits can vary but in 2011, silver had a demand supply deficit of 8,678 tonnes vs. 1,668 tonnes for gold. That is a ratio of 5 to 1. However, there is little to imply that the gold/silver ratio should be dependent on demand supply levels.

Debt growth and quantitative easing (QE) have become a consistent characteristic of the western economies – Japan, the US and the Euro Zone. Japan has a government public debt to GDP ratio of 212, the US has a public debt to GDP ratio of 74 while the Euro zone’s public debt to GDP ratio is 90 (all 2012 estimates). For the US all Federal government debt to GDP ratio is now around 102. Debt to GDP ratios at, near or over 100 subtract at least 1% annual GDP growth. Japan’s debt is so unsustainable that a rise in interest rates to 3% could cause the interest alone on the Japanese debt to consume 100% of their budget.

The US’s Federal Reserve is purchasing $85 billion a month or $1.02 trillion annually for its QE program. Japan is purchasing $1.4 trillion of bonds annually as a part of its QE program. As a percentage of Japan’s economy it is large when compared to the US. Annual production of gold and silver at $1,400 and $22 respectively totals only about $135 billion. Two major western economies are pumping roughly 17 times more fiat currency into the market every year then is produced in gold and silver.

The US monetary base continues to grow. The US monetary base has now grown to $3.4 trillion from $875 billion just prior to the financial crisis meltdown of 2008. No wonder there is talk of the “taper” as this growth is not only unsustainable the longer it is allowed to go on the higher the potential for another financial crisis. This dilemma fits well the “damned if they do” and “damned if they don’t” when it comes to continuing the current QE program.

Against this background it was naturally baffling the sell-off for both gold and silver from April to June 2013. The claim was that gold and silver were both overvalued. Against the backdrop of global monetary and debt growth the argument should be that instead they are quite undervalued.

Citibank has come out with a forecast of $3,500 for gold over the next few years. They believe that gold’s price rise should be driven by the ongoing easy monetary policies of the western economies of the US, Japan and the Euro zone. That and the growing mountain of debt in those countries coupled with strong demand for both gold and silver especially from the East (Asia).

Against this background, silver should outperform gold. If silver prices were to revert to their long-term potential of roughly 16 to 1 then with gold at $3,500 silver could rise to $220. That’s a long way from today’s price of $24 for silver.
Gold Silver Price Ratio
Gold Silver Price Ratio

General disclosures
The information and opinions contained in this report were prepared by MGI Securities. MGI Securities is owned by Jovian Capital Corporation (‘Jovian’) and its employees. Jovian is a TSX Exchange listed company and as such, MGI Securities is an affiliate of Jovian. The opinions, estimates and projections contained in this report are those of MGI Securities as of the date of this report and are subject to change without notice. MGI Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, MGI Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to MGI Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company.

“Technical Strategist” means any partner, director, officer, employee or agent of MGI Securities who is held out to the public as a strategist or whose responsibilities to MGI Securities include the preparation of any written technical market report for distribution to clients or prospective clients of MGI Securities which does not include a recommendation with respect to a security.

“Technical Market Report” means any written or electronic communication that MGI Securities has distributed or will distribute to its clients or the general public, which contains a strategist’s comments concerning current market technical indicators.

Conflicts of Interest
The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of MGI Securities, which may include the profitability of investment banking and related services. In the normal course of its business, MGI Securities may provide financial advisory services for issuers. MGI Securities will include any further issuer related disclosures as needed.

Technical Strategists Certification
Each MGI Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist’s personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist’s compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report.

Technical Strategists Trading
MGI Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein.

Dissemination of Reports
MGI Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm’s technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the MGI Securities website and davidchapman.com.

For Canadian Residents: This report has been approved by MGI Securities which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of MGI Securities in their particular jurisdiction where their IA is licensed.

For US Residents: This report is not intended for distribution in the United States.

Intellectual Property Notice
The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by MGI Securities or the party credited as the provider of the information.

MGI SECURIITES is a member of the Canadian Investor Protection Fund (‘CIPF’) and the Investment Industry Regulatory Organization of Canada (‘IIROC’).

All rights reserved. All material presented in this document may not be reproduced in whole or in part, or further published or distributed or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of MGI Securities Inc.
Thoughts On The Gold Silver Ratio

Related Articles

Thoughts On The Gold Silver Ratio

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Are you sure you want to delete this chart?
Write your thoughts here
Replace the attached chart with a new chart ?
Post also to:
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Post 1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email