What is the Gold to Silver Ratio Saying?

May 30, 2013 at 07:25


The natural ratio of the occurrence of silver to gold in the ground is typically estimated at roughly nine ounces of silver to one ounce of gold, and yet the recent trading price ratio of 62 to one is almost seven times higher.

After contemplating this curious anomaly, we are left wondering if comparisons between gold and silver may be as fruitful as comparing silver investment demand and silver industrial demand.

A relationship certainly exists between the availability of these precious metals and their relative prices, but it always seems rather abstract.

The recent 62 to 1 trading ratio of silver to gold clearly favors buying silver over gold, especially given a host of other favorable factors. These include: Bullish fundamentals, a likely bottoming technical picture in an oversold environment and a favorable COT sentiment structure.

Furthermore, from a historical perspective, silver’s price has traded at a much lower 13 to 1 ratio relative to that of gold on average, making the precious grey metal seem very cheap relative to its yellow alternative.

The mining supply of silver is always rather difficult to verify because of silver’s mixed history as a monetary metal, a currency and a commodity. When it comes to looking at the supply of metallic silver (Ag) vs. metallic gold (Au), yes gold is currently available, but at what price?

The ratio of silver to gold in above ground investment form is one ounce of silver to five of gold, as a conservative estimate.  Silver is actually considerably scarcer than gold in its investment grade form, and this could create a much bigger problem for the market in an environment where investment demand for silver is rising notably.

Both silver and gold can function as an unencumbered ultimate or final payment. Both monetary metals have acknowledged intrinsic value and are widely recognized as a form of currency.

Furthermore, the price of gold is ultimately confidence driven as fear and greed compete to set a market price. The supply of gold actually seems less important to its price than what people are willing to pay for the security it offers.

The silver market seems less affected by such confidence factors, perhaps because of the steady industrial drawdown.  Nevertheless, the current price ratio is so extremely distorted that rising costs of silver production could propel the price of silver beyond current expectations, and then ignite the price of gold as well.

Obviously, the price of silver has been ‘well managed’ over the last two years of trading, as large, concentrated short positions have been established and maintained in the paper silver futures market by big bullion banks.  In determining the current market price for silver, the physical investment demand profile for the precious metal has clearly been trumped by paper trading.

Still, given the current euphoria regarding equities, and the so-called economic recovery, the price of silver really “should” be performing better. This is not only because industrial demand for the metal makes up one component of silver’s demand profile, but this is nothing compared to the recent rise in investment demand for physical silver.

As long as wealth increases in Asia, the price of gold will continue to trend higher, since it is an ancient custom for Asians to own gold. The value of real estate in China is currently estimated at $200 trillion, and all the gold mined in human history is only about 5.5 billion troy ounces or $8 trillion worth.

Out of that, the amount of gold bullion currently available for investment is only about two billion ounces, with a market value of roughly $2.9 trillion. Annual gold production currently averages about $120 billion worth of the metal. Silver currently has an estimated above ground supply of only 1 billion ounces, which has an estimated market value of just $23 billion.

Currently, Japan and the United States alone are printing money at the combined rate of $160 billion a month, which amounts to $1.920 trillion a year. That is enough to buy two thirds of all the gold bullion in the world for each year this wanton money supply expansion is sustained.

The total volume of fiat currency being printed in the world every year is now more than enough to buy all the gold bullion in the world. Besides that, the level of U.S. debt and unfunded liabilities is increasing at the rate of $8 trillion every year. This alone is enough to buy all the gold bullion in the world about three times over.

Yet the precious metal bears actually seem to think that gold and silver are overvalued, or at least they say they do. Constant coordinated attacks by Western central banks give the illusion of weakness in the prices of gold and silver, but this is really only a temporary phenomenon as physical precious metals increasingly migrate to the East from the West along with the real wealth they represent.