One Thing Holding Silver Back — The Gold-to-Silver Ratio has Evolved

One Thing Holding Silver Back — The Gold-to-Silver Ratio has Evolved

Silver is easily forgotten about.

At roughly AU$38 per ounce, you can buy one ounce of the stuff and get change back from a 50-buck note.

And let’s be honest, the moves in gold are MUCH more exciting than moves in the silver price. Gold can jump US$20–30 per ounce in a day.

Heck, there’s been times when it moves US$100 in an hour.

But silver would be lucky to move a buck or two in response.

The lack of volatility — or excitement — is one of the reasons why many people never cover it.

Yet silver is a critical factor for our tech-driven lifestyles.

Without it, we wouldn’t have all our fancy tech gadgets.

Not only that, but throughout history, silver has co-existed with gold as a store of wealth.

The use of an official silver standard — that is, a widely accepted, government-backed form of money — goes back to the Athenian empire.

Bolivia, India, Spain, China, and Germany have a history of silver standards.

At the start of the 18th century, Isaac Newton introduced a mashup of the gold and silver ratio.

Newton popularised the concept for England to accumulate gold to protect wealth, while allowing silver coins to circulate as the money supply.

Hence the name ‘pound sterling’.

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Newton’s standard

Just like with gold, silver is money too. Though it’s often forgotten about. I’m guilty of only focusing on gold and neglecting silver.

Nonetheless, the history of how gold was once the official form of money, is because of silver.

The Roman Empire formalised the first gold standard…because of the silver standard it inherited from the Athenian Empire.

Furthermore, the Roman Empire was the first official government to debase its currency…whereas the Athenian Empire refused to when times got tough.

Both empires created precious metal standards for their respective economies.

Over the years, many empires came and went. Bolivia, India, Spain, China, and Germany have a history of silver standards.

Yet it was only at the start of the 18th century that Sir Isaac Newton introduced a mashup of the gold and silver ratio.

The gold-to-silver ratio has evolved in the few centuries it has been around.

The ratio was formally created in 1717 by Isaac Newtown and was a fixed ratio at 15.5:1. That is, it would take 15 ounces of silver to buy one ounce of gold.

Of course, over the following centuries, the amount of silver required to buy one ounce of gold increased.

Then, with the creation of the US Federal Reserve, a fixed amount of silver for gold was abandoned.

This means the ratio is no longer fixed and is free floating…

…leaving the market to determine silver’s worth against gold.

As a result, the gold-to-silver ratio is extremely volatile.

Check this out:


Port Phillip Publishing

Source: Macro Trends

[Click to open in a new window]

Essentially, you’re looking at the ‘worth’ of silver against gold over the past 105 years.

As you can see, decoupling from the gold standard increased the volatility in the gold-to-silver ratio.

In that time, the ratio has been as low as 18 and as high as 120.

However, when former US President Richard Nixon took the world off the gold standard, the new long-term average became 58.

In other words, over the past 48 years, it has taken an average of 58 ounces of silver to buy one ounce of gold.

Let’s compare that to now.

In April this year the gold-to-silver ratio peaked up above 100 for the first time. Only to storm higher to above 120 during an intra-period.

This had never happened before. It was a signal that something was out of balance in the gold and silver market.

By July this year, the price of silver caught up, nudging almost US$30 per ounce a few months back. The price rally meant the gold-to-silver ratio has fallen back down to 78 today.

The thing is, will the gold-to-silver ratio fall further, and get back to the historic norms of 58?

Maybe not…

No reversion to the mean

The most hated word of 2020 is ‘unprecedented’. Almost every event has been ‘unprecedented’.

However, after 10 months it becomes less ‘unprecedented’ and more the new normal.

Part of the problem for investors is, is how this new normal means we are really moving into uncharted waters.

That is, never before seen intervention in markets from politicians; central banks toying with monetary policy to influence markets. They are constantly seeking new and untested methods to get back to the old ways.

Quite frankly, the old ways are done.

Nonetheless, the legacy of today’s intervention will be a complete revaluation of precious metals.

The prices of silver and (to an even greater extent) gold are likely to be worth many multiples of themselves years from now.

However, I think looking at the ‘historic’ norms of the gold-to-silver ratio can be a bit of mug’s game.

Quite frankly, the price of gold is going to leave silver in the dust. I’ll explain in more detail next week.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

PS: Perhaps I just ruffled all the feathers of the silver bugs…you think gold bugs are passionate, ooft, you should meet silver bugs. They’ll always say how undervalued silver is. Remind you of the time the Hunt brothers cornered the market. Tell you that JPMorgan is manipulating silver and suppressing the price.

These things are true. All those events did happen. But here’s the thing that will stem a rising silver price. Silver is a consumable over gold. Silver has a strong scrap market. Silver is a key metal in renewable energy. First, you need to understand just how big the ‘Beyond Oil’ revolution is.

Come Thursday, I’ll explain to you how silver’s importance as a commodity will prevent it soaring…