Explore Monex

Why is the Gold-to-Silver ratio important?

David Morgan, Richard Daughty, Eric Sprott, Roger Wiegand, Michael DiRienzo
January 6, 2006
Video Transcript

Host: So let's look at the gold/silver ratio for three specific periods over the last century when silver made historic advances. In 1914, as WWI began, the gold to silver ratio was 41-1 by the end of the war the ratio was 15-1. In 1941, the early end of WWII, the gold to silver ratio was 96-1 by 1967 it was once again 16-1. In 1975, in the midst of an oil crisis, the gold to silver ratio was 40-1 by 1979 it was at 14-1. In July 2003, the gold to silver ratio was 77-1. In recent years, the ratios varied considerably from approximately 30-1 to 60-1, but now with silver in short supply, increased investment demand, and when you factor in the current economic conditions, many of the experts we interviewed believe that silver will, indeed, out perform gold on it's way back to the classic 16-1 gold to silver ratio.

David Morgan: I believe that the top of the market you're probably going to see what I call it the classic ratio, which is 16-1 ratio. Then you go from an 80-1 ratio to a 16-1 ratio, you've basically out performed gold on a 4-1 basis. Which is basically what happened in the 1970's, not afforded one but a much better performance by silver to gold. So again, I think you probably should own both, but if you definitely want a high flyer in your portfolio silver must be included in it.

Richard Daughty: It is so grossly underpriced, it's selling at a 50th the price of gold, less than a 50th. It should be selling between a 15th and a 10th of gold historically the price of gold.

Eric Sprott: The historic price relationship of gold to silver when they were currencies was at a ratio of 16-1 in terms of price. I could justify the 16-1 by looking at how much silver is in the earth's crust versus gold, it's in a ratio of 17-1. I could look at the production of silver, which is 900 million ounces a year versus 80 million ounces of gold, which is 11-1. So there's a lot to reason to think that the 16-1 number is not too far fetched in the real world in the long run. In the short run, what I look at is what people are doing with their money and to what extent are they buying silver versus gold. The data points I use are the following. The U.S. mint last month and all last year sold as many dollars of silver coins as they sold dollars of gold coins, which implies they sold 50 times more physical volume of silver than gold. But the amount of gold that's available for investment and the amount of silver that's available for investment in dollars is only at a ratio of about 7 1/2 to 1; there's 7 1/2 times more gold available than silver available. So if we all keep buying at 1-1, something has to give here. I can go to the Royal Canadian mint sales, which are about a dollar and a half of gold for a dollar of silver. One other item I use when we did the IP over a physical gold trust, we raised 440 million. When we did the IP over a physical silver trust, we raised 550 million. These people are making up their minds what they're going to buy, goodness knows why they're deciding to buy, but they're buying at a 1-1 ratio. You can't keep buying something at a 1-1 ratio when the price differential is 50-1. So I just have to believe that the price of silver will get back to a more appropriate level. So for all those reasons, I think the paper market has distorted the real physical market. Everything I see in the physical market says that the demand for silver is incredibly strong and that the price has to get back to a normal ratio.

Roger Wiegand, PhD: In my view, the gold/silver ratio should be around 15, but when things really get wild and they're going to, probably at the end of this many years rally in gold and silver, you're going to see a gain of about 80% of the whole many years run happen in the last eight months. During that period of time, when the signals that were near is that the gold and silver ratio will touch 15 and pause, and then go up and down a little bit by that number, but then we're looking for one final push and there would be an over run and the gold and silver ratio could go to about 10, and If gold was 5,000 or 10,000 an ounce you could imagine what silver will be.

David Morgan: That's what is going to happen in the silver market. It's a much tighter market than gold and it's more affordable than gold, and it's better known than gold, you're going to find that paper price on silver that is absolutely going to be unbelievable at the peak of this market. I cannot be or emphasis how bullish I am on the silver market long-term. We're at the growth phase now where you get maximum participation by the public that's waking up, money managers, hedge fund managers that manage money. They're all coming into the market. I just came back from Wall Street recently and I don't think they get it yet, which is great it means that the average investor should be taking a clear position now in this opportunity.

Michael Dirienzo: These metals are called precious for a reason. There are those that swear by the gold and silver ratio and there are others who make their decisions based on a whole host of other factors. The gold and silver ratio squeezed to its closest point in 2010 in over 25 almost 30 years. Will that happen again? It certainly could, I mean, we're seeing price increases in the price of gold since the beginning of the year and corresponding, probably, higher increases on a percentage basis for silver. So these factors could very well come into play and those that really follow the gold and silver ratio and are hoping for a tighter position between the two, I think, are going to be pleasantly surprised in that in the long run.

Never Miss Investing News from Monex

Sign up to receive our emails.
  • This field is for validation purposes and should be left unchanged.

See What Investors are Saying About Monex

Thank You!
Want your kit sooner?
Faster delivery is available by phone.
Get Your Free Report

A Better Future
with Precious Metals

  • All form fields are required

  • Privacy Policy
  • This field is for validation purposes and should be left unchanged.
Download Your Report