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[A]s we’ve consistently seen, when financial conditions get particularly rough, gold and silver lose their safe-haven appeal [but their]…prices may have already struck bottom and, [al]though we don’t expect them to run away to the upside, now may be the time for long-term investors to accumulate positions. That said, what should an investor buy: gold or silver? That is always an interesting question, but especially so during periods of rapid price movements such as now. [Below I analyze the gold/silver ratio and come up with the answer.] Words: 760
Gold/Silver Ratio
When prices were falling, silver got hit harder [than gold because]…it has a much more significant industrial-demand component [than] that [of] gold… – 46% vs. 11%, [respectively]. [As such], when economic concerns are prevalent as they have been recently, it’s no surprise that silver would fall more. On the other hand, when economic conditions improve, silver typically outperforms. This has been the paradigm over the past 20 years. The best way to see this is through the gold/silver ratio, which measures the relative value of the two precious metals. The higher the gold/silver ratio, the more expensive gold is relative to silver. Conversely, the lower the ratio, the more expensive silver is relative to gold.
From 1950 to 1980
Since 1950, the ratio has been quite volatile. From 1950 to 1980, it fluctuated mostly between 20 and 50.
From 1980 to 1990
From 1980 to 1990, the ratio surged to 100 as the sector plunged from their record highs amid a taming of inflation and central bank selling of gold.
From 1990 to 2000
The period from 1990 to 2000 saw a normalization in the ratio as silver prices ticked up a bit. Below is the gold/silver ratio since 1990, when the ratio peaked close to 100.
From 2000 to Date
2000 to 2011 is the latest period in which the ratio has trended significantly lower, as both gold and silver prices have rallied sharply [- but silver more so than gold].
The trend has been gradually, but consistently, lower. The only instance when the ratio deviated significantly from the overall downtrend was in 2008/2009 during the depths of the financial crisis in those years. Another peak corresponded with the dot-com bust during the early part of the last decade.
2011 Forward?
Many investors believe that the gold/silver ratio will continue to decline over the next decade as both gold and silver prices appreciate, with the latter rising more swiftly. Ultimately, the ratio may fall to levels below 20, where it last stood during 1980, when inflation ran rampant in the United States and other major economies.
While inflation isn’t yet at the double-digit levels witnessed back then, the argument is that the enormous debt burdens facing many countries will be monetized by central banks, eventually leading to inflation. We’ve already seen the beginnings of this to some extent. The quantitative easing programs in the U.S. and the U.K. have led to the monetization of more than $2 trillion worth of sovereign debt, while headline inflation figures are well above target ranges in both countries. At the same time, recent central bank buying has legitimized gold and silver as monetary alternatives to traditional fiat currencies. Meanwhile, robust demand growth from investors and consumers in emerging markets such as China and India is a bullish catalyst that wasn’t evident during the last major precious metals bull market. All of these factors bode well for continued gains in gold and silver prices, and a continued decline in the gold/silver ratio.
Conclusion
Looking at more recent price action, the ratio last stood at [around] 52,…[which] is above the upper trend line and thus signals that silver may be a relative bargain compared to gold. Earlier this year, the ratio hit a 31-year low near 32.
*http://www.hardassetsinvestor.com/features/3113-goldsilver-ratio-suggests-silver-buying-opportunity.html
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While the markets are troubled with liquidity, it’s more likely silver will move sideways and the GSR will rise. Around 60 GSR might be a good time to scale back into silver.
I’m a long term silver bull, but we just had 2 major down moves and it will take some time for traders to step back in and buy with the same kind of fervor. The silver market needs time to reform a base.