Question about the gold/silver ratio

Buffalode

I read a lot of comments about the gold/silver ratio, changes over time, and historical levels being an indicator for future prices. Just curious how much people rely on this ratio when deciding if or what to buy. Are there points when the ratio moves up or down that give strong buy signals for either gold or silver? I am still pretty new to PMs so I can't say I really understand why there would be a "correct" ratio, as prices for both can fluctuate and not always for exactly the same reasons. Thanks for any help to better understand this.

RedHerring

Take a look at this thread if you haven't already.

CU PM Thread

There are a lot of opinions on this subject.

Many people think silver is underpriced relative to gold today. I think they've both got a lot of upside, particularly silver.

roadrunner

If you look at a 650 yr chart of the gold vs. silver you will see that silver's importance has slowly waned over the centuries. I don't think anyone can say with any conviction what the gold to silver ratio "should" be today or tomorrow. 16:1 was a ratio used for a few hundred years during bimetalism. Now that neither metal backs monetary systems they are both free to seek their own levels, manipulated or otherwise. A 58-73 ratio as we've seen during the past year or so is not necessarily "proof" that silver is undervalued. During inflationary periods or when money is flowing into the markets, silver moves up more quickly than gold. During all other times gold usually performs better. It was only during the last year of the 1970's when silver finally outperformed gold big time and a GSR of approx 16 was revisited after having spent much of the decade at much higher levels. I tend to think that we will see the same type of performance from silver this time around. But that could be a year (or years) away still. And during the past 20 years the GSR has twice been >90. And there's no reason in another Sept/Oct 2008 type deleveraging event (GSR>90) that it couldn't revisit 90+ once again and still not alter the face of the PM bull market.

The gold to silver ratio is a useful tool to track liquidity flows/trends. And from liquidity trends one can get a sense of which direction PM prices are trending.

roadrunner

AboutAg

<< <i>I read a lot of comments about the gold/silver ratio, changes over time, and historical levels being an indicator for future prices. Just curious how much people rely on this ratio when deciding if or what to buy. Are there points when the ratio moves up or down that give strong buy signals for either gold or silver? I am still pretty new to PMs so I can't say I really understand why there would be a "correct" ratio, as prices for both can fluctuate and not always for exactly the same reasons. Thanks for any help to better understand this. >>



A lot of people believe that since the ratio of silver:gold has historically (until a century ago) around 15:1, that's where it should be today (and they often quote other unrelated ratios, such as the amount of silver in the ground to the amount of gold in the ground). As someone else pointed out, the old ratios were when bimetalism was prevalent, and likely wouldn't apply unless bimetalism came back.

As for the gold vs. silver in the ground, that ratio doesn't directly affect the silver:gold price ratio (e.g. if there are 10 ounces of silver in the ground for every ounce of gold, that doesn't mean that people will value silver at 1/10 the price of gold). I calculated a couple months ago that if that were the case, the average people would need something like a couple tons of copper in their possession.

Buffalode

Thanks for all the answers and information. Some of the articles and comments I have read elsewhere seem to be based on an assumption that the gold/silver ratio will return to some "nomal" level. That is the part I have had a hard time with as far as understanding a specific number being useful for predicting price moves. I also think both will go higher, and I know several people who have been PM investors for a long time who are convinced silver has more upside. I think my goal will be to get to about 50% each in value and keep increasing both, since I honestly don't know which will do better.
Thanks again for sharing your knowledge!

Edited to add a word I left out, typing is not my claim to fame.

BlackBeard

<< <i>If you look at a 650 yr chart of the gold vs. silver you will see that silver's importance has slowly waned over the centuries. I don't think anyone can say with any conviction what the gold to silver ratio "should" be today or tomorrow. 16:1 was a ratio used for a few hundred years during bimetalism. Now that neither metal backs monetary systems they are both free to seek their own levels, manipulated or otherwise. A 58-73 ratio as we've seen during the past year or so is not necessarily "proof" that silver is undervalued. During inflationary periods or when money is flowing into the markets, silver moves up more quickly than gold. During all other times gold usually performs better. It was only during the last year of the 1970's when silver finally outperformed gold big time and a GSR of approx 16 was revisited after having spent much of the decade at much higher levels. I tend to think that we will see the same type of performance from silver this time around. But that could be a year (or years) away still. And during the past 20 years the GSR has twice been >90. And there's no reason in another Sept/Oct 2008 type deleveraging event (GSR>90) that it couldn't revisit 90+ once again and still not alter the face of the PM bull market.

The gold to silver ratio is a useful tool to track liquidity flows/trends. And from liquidity trends one can get a sense of which direction PM prices are trending.

roadrunner >>



However, should Bimetallism for whatever reason return with the current industrial usage of silver in the technology industry which wasn't experienced in the past, silver would significantly close the gap on the current ratio.

I see silver having nothing but upside overall in the future. Merely a personal opinion.

Lastly, $4 silver less than 10 years ago was a great bargain.

Wolf359

According to what I've read, one way to drag down the price of Gold is to short Silver so naturally the Gold and Silver ratio increases over time. Whatever the case, the world markets mostly trade paper IOU's and don't require the physical metal to complete transactions. As a result 10% or more of the known world's silver supply is traded every day (what a joke). Remove the suppression/masking effect that the paper markets have placed on Gold and Silver and the market will determine what the proper ratio is.

Buffalode

<< <i>According to what I've read, one way to drag down the price of Gold is to short Silver so naturally the Gold and Silver ratio increases over time. Whatever the case, the world markets mostly trade paper IOU's and don't require the physical metal to complete transactions. As a result 10% or more of the known world's silver supply is traded every day (what a joke). Remove the suppression/masking effect that the paper markets have placed on Gold and Silver and the market will determine what the proper ratio is. >>



I followed the CFTC hearing and the related articles, comments, etc about this manipulation/suppression issue. It will be interesting to see if anything ever does happen that really makes a difference. Assuming that prices do go a lot higher, will we see higher premiums on physical metals over the "spot" or will premiums be lower as a percentage of value? I guess what I am trying to get at is will there be more of a divergence between the "paper' market and the actual physical trading at the level where most of us are probably involved? I'm sure I ask a lot of questions that don't have a definite answer but I still value the opinions I read here.