The current gold:silver ratio had been range-bound between 60:1 and 70:1 for quite some time until dropping to 47:1 at year end and down to as low as 42:1 recently which is way out of whack with the historical relationship between the two precious metals as seen below. It begs the question: “Is now the perfect time to buy silver instead of the much more expensive gold metal?” Words: 1339
Editor’s Note: For an updated version of this article please go to: https://munknee.com/2011/05/silver/
So says Lorimer Wilson, Editor of www.munKNEE.com. (Please note that this complete paragraph, and a link back to the original article*, must be included in any article posting or re-posting to avoid copyright infringement.)
Precious metal bull markets have 3 distinct demand-driven stages and we are now quickly approaching or perhaps even in the very early part of stage which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. go parabolic) in price.
Gold to $5,527.69?
Gold went up 24% in 2009 and 30% in 2010 and, as such, there are no shortage of prognosticators who see gold going parabolic reminiscent of 1979 when gold rose 289.3% in the course of just over a year (from a $216.55 closing price on Jan. 1, 1979 to a closing price of $843 per ounce barely a year later on Jan. 21, 1980) and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks!
A 289% increase in the price of gold from the Jan. 1 2011 closing price of $1421 would put gold at $5,527.69. (More on what that might mean for the future price of silver is analyzed below.) That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don’t seem quite so far-fetched. (Go here for a complete list of the economists, academics, market analysts and financial commentators who maintain that gold will go parabolic to $2,500 -$15,000 in the near future.)
Silver to $256.74?
Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle along with gold. The 49% increase in silver in 2009, and 83% in 2010 attests to that in spades. During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the Dec.31, 2010 price of $30.84 would represent a future parabolic top price of $256.74. (For what that might mean for the future price of gold see the analysis below.) Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.
How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship – the correlation – of one to the other over time which is called the gold:silver ratio. Based on silver’s historical correlation r-square with gold of approximately 90 – 95% silver’s daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver’s price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attest.
Let’s look at the gold:silver ratio from several different perspectives:
– In the last 25 years (since 1985) the mean gold:silver ratio has been 45.69:1 and is currently approx. 47:1
– During the build-up to the parabolic blow-off in 1979/80 the ratio dropped from 38:1 in January 1979 to 13.99:1 at the parabolic peak for both metals in January,1980. – Were the % increases in gold and silver during the 1970s parabolic phase (as mentioned above) applied to the 2010 year-end prices of gold and silver the resultant prices of %5,527.69 and $256.74 would result in a 21.5:1 ratio between the two.
Let’s now look at the various price levels for gold and the various gold:silver ratios mentioned above one by one and see what conclusions we can draw.
First let’s use the year end price of $1,421 for gold and apply the various gold:silver ratios mentioned above in approximate terms and see what they do for the potential % increase in, and price of, silver.
Gold @ $1,421 using the year-end 47:1 gold:silver ratio puts silver at $30.23
Gold @ $1,421 using the above mentioned 21.5:1 gold:silver ratio puts silver at $66.09
Gold @ $1,421 using the above 13.99:1 gold:silver ratio puts silver at $101.57
Now let’s apply the projected potential parabolic peaks of $3,000, $5,000 and $10,000 to the various gold:silver ratios and see what they suggest is the parabolic top for silver.
Silver’s Price Range With Gold At $3,000
a) Gold @ $3,000 using the gold:silver ratio of 47:1 puts silver at $63.83
b) Gold @ $3,000 using the gold:silver ratio of 22:1 puts silver at $136.36
c) Gold @ $3,000 using the gold:silver ratio of 14:1 puts silver at $ 214.29
The above analyses bears closer scrutiny. In paragraph four above it was noted that “During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the Dec.31, 2010 price of $30.84 would represent a future parabolic top price of $256.74 which is only slightly higher than the price of $214.29 that would result from a 14:1 gold:silver ratio with gold at $3,000; the $227.27 that would result from a lesser 22:1 gold:silver ratio with gold at $5,000; and the $212.77 that would result with gold at $10,000 even with the gold;silver ratio remaining the same as it was at the end of 2010 as the analyses below suggest.
Silver’s Price Range With Gold at $5,000
a) Gold @ $5,000 using the gold:silver ratio of 47.1 puts silver at $106.38
b) Gold @ $5,000 using the gold:silver ratio of 22:1 puts silver at $227.27
c) Gold @ $5,000 using the gold:silver ratio of 14:1 puts silver at $357.14
Silver’s Price Range With Gold at $10,000
a) Gold @ $10,000 using the gold:silver ratio of 47:1 puts silver at $212.77
b) Gold @ $10,000 using the gold:silver ratio of 22:1 puts silver at $454.55
c) Gold @ $10,000 using the gold:silver ratio of 14:1 puts silver at $714.29
It would appear that, any way we look at it, physical silver is currently undervalued compared to gold bullion and is in position to generate substantially greater returns than investing in gold bullion.
Gold:Silver Ratio Conclusion
History will look back at the artificially high gold:silver ratio of the past century as an anomaly, caused by the dollar bubble and the world being deceived into believing that fiat currencies are real money, when in fact they are all an illusion. This fiat currency experiment will end badly in a currency crisis and when that happens, as it surely will, gold will go parabolic and silver along with it but even more so as the gold:silver ratio adjusts itself to a more historical correlation.
The wealthiest people in the future will be those who put 10% to 15% (or perhaps more – much more!) of their portfolio dollars into physical silver today and were smart enough to research and pick the best silver mining/royalty stocks and warrants to leverage/maximize their returns.
Indeed, while gold’s meteoric rise still has room to run, silver’s run is only getting started. Certainly, if the historical gold:silver ratios are any indication, it appears evident that now is the time to buy all things silver.
If things start getting really bad, then people will be like sheep heading to precious metals by that time gold and silver will be unaffordable to those who came late on the action. I don’t think JP Morgan will be able to manipulate the silver market when that happens, that is silver price.
Buy precious metals every week or two what ever you can afford and keep buying. If the us economy doesn’t tank as some predict then keep the precious metals, don’t sell it. Americans don’t value gold like China, India, and other middle eastern countries. Maybe we will see just what precious metals can do when the SHTF and appreciate gold and silver value. Precious metals have proven to stand against paper money time and time again.
It costs $6 to $8 per ounce to mine silver, $400 to $500 for gold. That determines a ratio of spot prices between 50:1 and 80:1. (But with plenty of room to go outside that range!) That situation has existed since the opening of the Comstock mine (Nevada) in 1890, and there was a noticeable effect when the Potosi mine (Peru) was opened in 1545.