Historical Ratio Between Gold and Silver Prices
Modern precious metals markets have been highly violate, with larger prices swings from one day to the next. With such volatility for an extended period of time, it can be easy to lose sight of what certain commodities are actually worth. In this article we will explore one tool that can help precious metals investors determine a realistic value for gold and silver, based on their historical relationship.
Throughout civilized history, gold and silver have been used as money. Interestingly, there has always been a fairly constant ratio of the amount of silver one can buy with one ounce of gold. For much of history, the ratio was about 12:1 – 15:1, meaning that one could buy 15 ounces of silver for one ounce of gold. In Roman times, the ratio was actually fixed at 12:1, and even in earliest days of the United States, it was fixed at 15:1.
Then, we enter the 20th century and Gold prices skyrocket. By 1900, the ratio is 32:1 and swings wildly within the century from 32:1 all the way to 97:1. Much of these swings have been the result of speculation by investors, driving up the price of one against the other. The Hunt brothers in the 1980′s are notorious for driving up the price of silver, lowering the ratio in down to 17:1.
As of writing in early 2012, the ratio is approximately 56:1, with gold prices at $ 1,616 and silver at $ 28.75.
It is apparent that, for virtually all of modern history after the 19th century, the ratio has vastly bent different than it’s historical average. The question investors must ask themselves is whether or not the ratio has fundamentally changed, or we’re experiencing a temporary (100+ year) imbalance. Will the ratio return to 15:1, or is 50:1 the new normal?
If an investor believes that 15:1 is level where prices will soon return, there is an obvious imbalance in the marketplace. That means one of two things: 1) silver is highly underpriced (by about 3 times it’s current value) or 2) gold is highly overpriced (by about 3 times it’s current value). In actuality, both are probably true: gold is overpriced and silver is underpriced.
Of course, no one has these answers, and investors must look at all available information to make the best decisions for their own situations. If one looks at the trends, however, it appears that it would not be out of possibility for the ratio to return to under 30:1 within the next few years. This would imply an increase in silver prices and/or a drop in gold prices. But again, this is simply one tool that investors of gold and silver can use to make more informed investment decisions.