The Gold/Silver Ratio Deception: Why 15:1 is a Relic and 80:1 Signals Opportunity.
GoldSilverRatio SilverInvesting PreciousMetals # · MeanReversion GoldPrice SilverPrice Commodities
The Gold/Silver Ratio (GSR), which measures how many ounces of silver it takes to buy one ounce of gold, is one of the oldest continuously tracked financial metrics. While it remains a popular tool for investors seeking to gauge the relative value of the two metals, its interpretation hinges entirely on which historical era you choose to analyze.
The core debate for modern investors is the difference between the fixed ratio of ancient monetary systems and the free-market ratio that has prevailed since the 1970s.
The Misleading Appeal of the Ancient Ratio: For centuries, governments, from the Roman Empire (around 12:1) to the United States with the Coinage Act of 1792 (15:1), legally fixed the value of silver to gold. The widely cited historical average of 15:1 to 16:1 is historically accurate, but it is a relic of a bimetallic standard where the ratio was set by law, not by free supply and demand.
Using this ancient ratio to forecast today's silver price, while mathematically simple, is highly misleading. For instance, with gold priced at $4,036. per ounce, a 15:1 ratio would imply a silver price of over $269. per ounce. This calculation represents a theoretical value based on a monetary system that no longer exists in the modern world.
The Reality of the Modern Free Market: The last ties of the global monetary system to a gold standard were severed in 1971, ushering in an era of floating fiat currencies and a free-market price for precious metals. In this modern context, the relationship between gold and silver changed dramatically, primarily because silver, unlike gold, has a dual nature as both a precious metal and a critical industrial metal.
This industrial demand—driven by electronics, solar power, and other technologies—makes silver more volatile and sensitive to economic cycles than gold, which is primarily viewed as a monetary safe-haven.
Since 1971, the long-run average of the Gold/Silver Ratio has typically ranged between 55:1 and 65:1.
Trading the Ratio: A Measure of Relative Value: As of the date of this analysis, the Gold/Silver Ratio sits at approximately 80:1, which is significantly above its post-1971 average.
This elevated ratio is the salient point for modern investors:
1. Silver is Currently Cheap Relative to Gold: A high ratio like 80:1 suggests that silver is undervalued compared to gold based on modern historical norms.
2. The Mean-Reversion Opportunity: Investment strategy often revolves around the idea of mean reversion. If the ratio were to revert to its modern-era average of 65:1, the corresponding silver price would be over $62 per ounce (assuming gold remains at $4,036).
3. The Extreme Scenario: While a return to the ancient 15:1 ratio is highly improbable, a repeat of the extreme 2011 rally, which saw the ratio plummet to 31:1, would push silver's price to approximately $130 per ounce.
In conclusion, the Gold/Silver Ratio remains a powerful relative valuation tool. Its utility today lies not in chasing an ancient, fixed price (15:1) but in identifying when the free-market ratio is at its modern extremes (like 80:1) to signal a potential opportunity for silver to significantly outperform gold as the ratio contracts toward its 55:1 to 65:1 post-1971 average.
SNP
Comment below, what’s your take? Like and repost.
For information only and not a recommendation to buy or sell shares.
Mining News: www.minestockers.com (Disclosure-the writer is a shareholder of minestockers.com)
Comments
Post a Comment