Thursday, August 25, 2011

Trends In The Gold to Silver Ratio Point To Lower Ratio In Bull Markets (gold & silver standard)

   The gold to silver ratio was 16 in 1980 when silver reached $50/oz but it was only there momentarily, for most of the next two decades it was over 65 (when gold ranged in price from $250 to $500), between 2000 and 2003 it was 60 to 80 before falling to 47 to 55 in 2005-2008 which is notable since that coincided with gold's rise from $425/oz to $1000/oz. In the ensuing years (2008-2010) the ratio nudged higher, remaining between 50 and 70 at the same time gold went from $800/oz to $1250-$1300 per ounce (about 4X greater than it was during any of the previous 25 years);
However following that period the ratio experienced one of its biggest declines to date going from 70 in February 2010 to 33 in April 2011, subsequently gold broke into new territory, gold was $1540/oz in April 2011 when silver reached $49/oz (end of month) signifying that over the long term, the ratio decreases when gold prices reach higher support levels. In February 2011 in the midst of a commodities bull market the gold:silver ratio reached its lowest level in 13 years,
Meanwhile gold reached parity with platinum on August 8, 2011, an unusual occurrence but not surprising given that concerns over platinum demand coincided with gold investment peaking due to economic uncertainty. Prior to that, the 20 year high was 0.93, attained in October 1992. Platinum was worth 24% more than gold at the start of 2011, by August 23, 2011 the difference fell to only 1.8% even though Jan-Aug platinum production was 12X less than gold production. (Long-Term Decline In Gold/Silver Ratio To Favor Silver) 2nd Graph: Gold to Platinum Ratio 2007-2011

The gold to silver ratio averaged 59 from 1976 through February 2011 but the average in the earlier years was much lower, the ratio average was 49.1 in the 1980's, 31.3 in the 1970's, 78.5 from 1990-1997 then 53.8 from 1998-2000; the current average of 44.5 (January through August 2011, update: as of Nov 19 the ratio is 53.2 which is about at the 1 year high of 54.24, average Jan-Nov is about 47) is still a lot higher than the 16:1 ratio that held up for more than 160 years from 1700 until the 1860's (was 16 during the US Coinage Act of 1873), in the 1930's was when things started to change but there was a new driving force there: China stopped using the silver standard spilling a lot of excess silver onto the open market, much more than industrial demand. In 19th century Britain, numismatically (coins were predominantly made of gold and silver) the gold to silver ratio was 14.29 as per the monetary law established in 1816 (20 schillings (silver) equaled 1 sovereign (gold). In France the ratio was set at 15.5 in 1803 the same ratio used the United States to determine the monetary relationship between gold and silver coins. Then, around 1870 the gold standard slowly replaced the gold-silver standard (silver was still used but fewer countries linked a coin's monetary value to the amount of silver it had (silver supply skyrocketed with higher US production rates while Germany and Scandanavian countries dumped silver onto the markets due to their abandonment of the silver standard). The ratio rose to a high of 30 by 1894. (Energy & Mining: The ratio gold and silver from 1800 to 1900)

Presently, the lower long term ratio has numerous causes: gold has few alternatives especially with regards to its biggest consumer (jewelery) and silver being much more affordable becomes a more attractive option. The price difference also makes silver a more attractive investment option (in January 2011 the US Mint recorded a one month silver coin sales record of 6.422 million ounces). Alternatively, the short term rise in the ratio is because the biggest investors in bullion (countries, banks, billionaires) favor gold and because a short term price correction always happens when silver rises too fast due to traders erring on the side of caution (if silver rises too fast traders begin to put more emphasis on technical data). In the year leading up to September 2010, gold soared 28% while silver grew only 4%, but in 2011 silver grew at a slightly faster pace showing once again that there's a time lag between silver and gold at the beginning of a commodities bull market. Production of silver is only about 9.5X greater than that of gold, another reason to consider the current price ratio of 43 to be too high.

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