Gold:silver ratio path not necessarily bullish for silver investors
Although the historic Gold:Silver ratio may be around 16:1 current patterns do not suggest any likely return to this level - indeed the ratio may yet get worse for silver investors.
Posted: Friday , 15 Jun 2012
LONDON (MINEWEB) -
Much is made by commentators of the historical gold:silver ratio (GSR) being around 16:1, while the current ratio is more like 55:1, with the implication being that silver will return to its historical ratio to gold. If this were to happen overnight it would put the current silver price at a little over $100 an ounce - in the writer's view this won't happen, even in the long term, although there is definitely room for silver to appreciate more than gold in percentage terms in the days, months and years ahead, particularly if the gold price makes a rapid climb towards the $2,000 level which many do expect.
The reason we do not see the GSR returning to 16:1, is that silver is nowadays an industrial metal with an important investment element, while historically it was, like gold, a monetary metal. But true silver-based coinage is long behind us, while the world's Central Banks do not see silver as forming a part of their reserves. True gold coinage, where the face value represents the metal content, does not exist either, but at least Central Banks continue to maintain gold as a key element in their holdings - although interestingly it is mainly the Western Central Banks which retain the high gold ratios in reserves, rather than the Middle Eastern and Asian ones where traditionally one might expect a greater propensity to hold gold as a monetary asset. There does seem to be a move to rectify this in the East, which is gold price positive, but there is huge ground for these banks to make up to bring gold percentages in their holdings anywhere near European and American ratios - perhaps itself a positive factor for the yellow metal.
Regarding silver though, the last time it came anywhere close to the historical 16:1 ratio was in 1980 - comparatively recently you may say -, but this was during a totally false, manipulated situation when the Hunt Brothers almost succeeded, but not quite, in cornering the silver market. The ratio fell back almost as quickly as it had risen once the price collapsed again. In an interesting chart below from Peter Brandt published almost a year ago he pointed to a return to a GSR of 50:1 - a pretty good indicator of what has occurred since. The chart also suggests that the trend is actually towards 60:1 by around 2015 - see below:
There are, and have been since, some quite strong variations above and below the trend line which suggests that there gains to be made in trading silver if one can judge the peaks and troughs correctly.
While there have been short term breaches of Brandt's general thesis on silver prices over the past year what he showed in the chart has been pretty accurate overall. What is, perhaps more disturbing for silver investors though, is that the GSR has been at a level of higher than 50:1 for most of gold's 12 year bull run and for much of the quarter of a century before it. Recent stats just don't support the return to 16:1 ratio at any time unless there is a huge surge in industrial demand for the metal through new uses.
Current silver supply is in excess of industrial demand, but perhaps not sufficiently so that a big rise in investment demand, perhaps created by a significant gold price jump, could alter the balance in silver's favour. With silver's penchant for volatility you can't write this off, but overall the general portents don't look that strong for gold's less costly sibling.
The above analysis probably won't dissuade the silver bulls from their path and silver's volatility is, in the writer's view, more likely to see the GSR fluctuate between around 30:1 and 65:1 in the year or so ahead. A particularly sharp run upwards in the gold price could well encourage silver investment to take off and drive the ratio down which certainly does make for the opportunity of some good gains, but if gold remains range-bound, or dips, then the 60:1 ratio looks almost inevitable purely through lack of excitement and diminishing speculative interest.