What is the Correct Gold/Silver Ratio?

March 26, 2020

Patrick Heller


If you look at the COMEX closes on March 24, the spot price of gold was about $1,585.00 and silver was about $14.23. If you divide the price of gold then by the price of silver, you get a ratio of 111.4 to 1. What that means is that it would take the value of 111.4 ounces of silver to equal the value of one ounce of gold.

In the past week, the ratio calculated in this manner has run as high as about 125. This is, by far, the highest this gold/silver ratio has ever hit. In fact, the ratio in recent weeks topped 100 perhaps for the first time ever (it came close in late 1940 to early 1941 and in late 1990 to early 1991).

I contend that the 111.4 to 1 ratio that is derived from trading in the commodity futures markets (which trade almost exclusively paper instead of the actual metals) does not accurately reflect the physical market. Before I dig further into that issue, let’s review the history and importance of the gold/silver ratio.

This ratio is simply a way to track the relative values of two precious metals—and also theoretically a way to compare their relative rarity. At the beginning of the Roman Empire, Emperor Augustus reformed the monetary system so that the gold aureus was equal in value to 25 of the silver denarii. Since the aureus had somewhere about twice the weight of gold as there was silver in a denarius, that indicates a gold/silver ratio over 2,000 years ago in the 12 range.

For many decades and even centuries, kings and other political leaders considered the correct ratio to be 16. When the price of silver fell in the United States after large lodes were discovered in the West in the 1870s, Americans tended to disfavor holding silver coins as not representing the full worth of the stated face value.

In the late 1800s to early 1900s when the U.S. Mint struck $20.00 gold double eagles (0.9675 ounces gold content) and $1.00 dollars (0.7734 ounces silver content), that indicated respective values for the two metals at $20.67 per ounce for gold and $1.2929 per ounce of silver. That worked out to a gold/silver ratio of almost 16.

When the U.S. government revalued its gold to $35.00 per ounce in 1933, that increased the ratio to just over 27. But the world price of silver during the early years of the Great Depression, 1930-1931, dipped as low as $0.28 per ounce, meaning that the effective ratio was about 74. In late 1940 to early 1941, the world price of silver fell to $0.35, making the effective gold/silver ratio 100.

Today, there are still some people advocating that the natural gold/silver ratio should return 16. There are also those who argue today that since newly mined silver production is less than ten times that of gold that the ratio should be 10 or even less.

In recent years, the gold-silver ratio has mostly been in the 60s to 80s. This has led many people, including me, to argue that silver is undervalued compared to gold.

In my mind, my non-scientific semi-educated forecast is that the long-term equilibrium ratio is likely to be in the range of 35-40. When the spot price of silver soared to almost $50 at the end of April 2011, the ratio fell to about 30. I do not foresee the ratio over the long haul dropping much below that level.

Now, let’s go back to what is the accurate gold/silver ratio right now. Ultimately, this ratio will be determined by the physical supply, demand, and available inventories for the two metals, not the relative prices for commodity futures (paper) gold and contracts.

When physical prices traded close to paper market prices, this distinction was unimportant. But, today, the physical gold and silver markets are both trading at much higher price levels than the paper markets.

At the COMEX close on March 24, 2020, the lowest price form of physical gold that was being sold by the company where I work was the U.S. American Arts Medallions. In quantities of 10 ounces, we were selling them at $1,708 per ounce. For physical silver products, our lowest premium item was generic 100-ounce silver ingots. In 10-piece lots, these were selling at $17.48 per ounce. Dividing the price of the gold produced by the silver yields a gold/silver ratio of 97.7. In my judgment, that is a closer and more accurate indicator of the “real” gold/silver ratio today than looking at just the paper contract market prices.

Even at this lower ratio today, it is still far higher than my projected long-term equilibrium ratio. Consequently, I project that over the long term the price of silver will outperform that of gold by well over two times from where they are at today.

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