Gold Silver Ratio 2015: Can Silver Rise When Gold Falls?

November 17, 2014

The gold/silver ratio has hit five-year highs. Analysts say that makes silver cheap.


[This article originally appeared on BullionVault and is republished here with permission.]

Silver looks cheap right now, and not only because it has dropped 70% in Dollar terms over the last three-and-half years. That, says Yahoo Finance, is the view of smaller private investors, apparently "wedded to [the] idea that the Fed is going to destroy the Dollar" even as QE ends and rate-hikes are next.

But a growing number of professional analysts also say silver is cheap, and very cheap compared to gold. Cheap enough to make buying it over the heavier metal – or even "ratio trading" the precious pair, shorting gold and going long silver – an attractive play.

The core idea is that the long history of gold and silver as monetary metals still lingers, and their prices still track each other very closely today. So first up, UK consultancy Capital Economics. The drop in both precious metals is overdone, they think, but the Gold/Silver Ratio is really out of whack. Because as both metals have sunk in price, silver has fallen too fast, sending the relative value of gold to 5-year highs near 75 ounces of silver per 1 ounce of gold.

What Capital Economics calls the more "normal" ratio of 60 would, on flat gold prices, take silver back up to $20 per ounce by end-2015 as gold rallies to $1200 on their forecast. Because silver is primarily an industrial metal, it could then rise again to $23 in 2016 on "any economic recovery". But gold, being relatively useless to industry while loved by consumers and investors, is seen trading shy of $1400 two years from now.

Trouble is, that "normal" level of 60 is an average of only the last 20 years. Longer-term averages in the Gold/Silver Ratio are lower – much lower. So either silver is deeply undervalued against gold today, or the underlying trend in the Gold/Silver Ratio points higher because the world is choosing to price gold more highly over time.

Physically, the earth's crust contains perhaps 20 times as much silver as gold. Global mine output last year was at a ratio of 8-to-1. But at market prices, here's how the Gold/Silver Ratio has moved in the last 100 years.





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