E-I-G-H-T-Y F-O-U-R TO O-N-E
Not since 2008 has the gold silver ratio been this high. Today it has backed off slightly and the ratio is now down to 83.
It is simply the price of an ounce of silver divided into the price of an ounce of gold. The resulting number shows how many ounces of silver it takes to buy an ounce of gold.
The ratio is used as a method of valuing silver against gold. It can also be used as a way to determine when it is better to buy silver and when it is better to buy gold. A higher ratio means silver is undervalued compared to gold. Conversely a lower ratio means silver is overvalued compared to gold.
With the ratio reaching over 80, silver is undervalued compared to gold on a historical basis.
However we have seen the ratio as high as 100 back in 1991, so there is always the chance it could go higher yet.
Mike Maloney gives his take on it in the video below. In a nutshell he says that silver is undervalued compared to gold. But both are undervalued compared to dollars.
So people are rushing toward gold and ignoring silver.
This is a rare event and likely won’t last. He prefers to buy gold when the ratio gets below 50 and buy silver when it’s around 80. As shown in the chart below.
There are two points of view on what a new high in the gold to silver ratio may mean.
1. That precious metals remain within the bear market or downtrend they have been in since 2011.
Why? Because only gold has been rising in recent months and silver has not confirmed gold’s rise. i.e. a high gold silver ratio. So this argument says a bull market in precious metals will only occur when both metals are rising.
2. Conversely it may be that silver is merely lagging gold and will play catch up before too long.
Gold is viewed as more of a flight to safety or crisis hedge than silver. So it is not surprising to see gold stronger than silver while sharemarkets have been falling lately.
Also back in 2001, at the start of the current bull market in precious metals, gold performed better than silver and precious metals miners did better than both metals. Silver was the last of the 3 sectors to recover and reached its lows in November 2001 (see the chart of that period of time below comparing, gold, silver and the XAU miners index).
So perhaps we are seeing something similar play out here now?
We stumbled across the below video that also lends some weight to this second scenario. (It’s a little rambly but we also outline the gist of it below).
Youtuber “JSNIP4” talks about a post made on silverdoctors asking “Is the Gold / Silver Ratio Sending Us A MAJOR WARNING??”
“Over the last 100 years, the major peaks and troughs of the silver/gold ratio [GTSR] have marked HISTORIC turnings in the markets.
As the ratio surges through 80 to 1, is the gold / silver ratio trying to send us a MAJOR WARNING?”
It then goes on to outline how they believe the peaks of the ratio indicate peaks of economic stress…
“Major GTSR Peaks and Troughs:
Sept 1931: 78 The Depression bites hard–gold is a monitor of fear
July 1940: 97 Winds of War are blowing hard
May 1968: 16 Lots of war(over there), DOW is high, inflation is low PMs are kicked to curb
April 1972: 31 Watergate, War is going badly, higher inflation and taxes, wage and price controls
June 1973: 45 Losing war, recession, DOW crash post gold standard, inflation and joblessness high
Jan 1975: 42 DOW at low, inflation and unemployment hit 10%
Jan 1976: 26 Pivotal presidential election year—hopes for revival are high.
Dec 1979: 14 The gold and silver rush in [sic] on, silver skyrockets in price Thank you Bunkie!
Mar 1980: 41 Gold and silver are near their peak in price
June 1983: 36 Interest and tax rates are down, economy starts to pick up.
Oct 1986: 76 Economic and banking headwinds, Russian and currency crises abound
Jan 1991: 100 Start of major banking crisis, housing crash, 1000 banks were closed
Sept 1991: 92 Continuation of bank and housing crash
June 2003: 79 Culmination of tech wreck
Nov 2006: 49 Low GTSR, a couple of months before the 2007-09 housing and market crash
Nov 2008: 81 One month after Lehman crash
April 2011: 32 Two months after the gold/silver price peak and price crash–an outlier event
Feb 2016: 80 Let the good times roll—NOT”
Note that the swings have become more radical and violent in the last 40 years
The systemic stresses grow daily as the gold to silver ratio climbs.
The chances are much better that gold will go up significantly in price before silver. Silver is a lagging indicator.
I surmise gold goes up first because it is a metal that means something to the central banks, central governments and wealthy individuals.
Silver is poor man’s gold and when the vast majority of people realize they are behind the curve and must acquire precious metals, they go to silver.”
So in essence, gold is rising as an indicator of economic troubles brewing and a loss of faith in governments and central banks. Wealthy individuals are buying gold.
Silver will catch up when more people start to notice and they buy silver.
We’re leaning more towards the second scenario. Believing (and okay maybe hoping!) that a new bull market in precious metals has begun. But that silver is lagging gold (and precious metals miners) much as it did back in 2001.
As we’ve said many times that’s why when people say gold or silver, we prefer to say gold and silver.
Own some of both as they perform differently under different circumstances. But right now the ratio says that silver may be a better buy than gold. So there is a good argument for heavily skewing any purchases in favour of silver.
What do you think? Show us you’re alive and leave a comment below!