Friday, December 9, 2011

Gold/Silver ratio revisited

I was surprised to read an article by a gold investor (which somehow I cannot remember where was that) stating that he is convinced the gold/silver ratio will not go below 40. For several decades, the gold/silver ratio has been kept above 40 with only visiting it briefly around 15 in early 1980. The reason I was surprised is that the amount of silver in the ground is roughly between 12 and 15 times that of gold so why would the price be 45 or higher than?
The arguments might be that gold is being used more widely as a monetary metal than silver. This means then that this same mismatch of ratio between the amount of gold mined every year and silver mined every year compared to their price should be seen with other commodities being compared with gold. Other commodities such as say copper. So, I've done some research to find out what are the current numbers for copper versus gold and silver:

As can be seen, the ratio of the yearly amount of copper mined every year compared to that of gold is roughly the same as the price of copper versus gold, meaning that purely from a mining perspective, copper is priced right compared to gold (6875 compared to 6250). But we can also see that in the case of silver, it is clearly under priced compared to gold. If silver was priced comparatively similar to copper, it would have a gold/silver price ratio of about 9, meaning a price of $220 per once on today's market (December 9, 2011).

Of course, this only cover the supply side, but it is interesting considering that silver is both an industrial metal as well as an investment being undervalued compared to copper which is only an industrial metal. Also, silver has about all the properties of its sister metal - copper - but even better. It is a better conductor of heat and electricity than copper. To me, this is quite bullish for silver considering the condition we are heading towards with the amount of paper and electronic money expected to paint over the debt bubble. They will print because they are at the source of the printing press and will be the first to benefit. They will print because that's the only thing history has shown politicians have ever learned to do.

In the meantime, perhaps this will be an interesting read to get an historical idea of where this distortion takes its root...
Silver stealers by Charles Savoie


  1. Hi Phil

    I just read your comment on the TDV blog. I was wondering, what are your thoughts on Anglo Far East and Brinks for storing physical bullion (silver specifically)?

  2. I think both are goods and I think the best strategy is the "shot gun" approach :-)
    Spread over geographically and by whom it is stored.
    Take care!