The Silver to Gold Ratios

 

There are a number of different ratios to talk about when comparing the two metals.  Each can provide us with information regarding which metal is the better performer at any given point in time.  The four being presented here are the production, inventory, price, and stock-to-flow ratios.

 

The Silver:Gold Production Ratio

Silver was originally 17.5 times more plentiful in the Earth’s crust than gold.  That’s how Mother Nature desired it to be.  The historic ratio of the two metals taken out of the ground was very close to this ratio until relatively recently.  Today, the production ratio is less than half of what it had been for many centuries.

Silver is generally found closer to the surface than gold because of epithermal deposition.  Some gold mines in South Africa are close to three miles deep; the deepest in the world.

The worldwide production ratio from 1493 to 1931 averaged about 13 ounces of silver mined for every ounce of gold.  Presumably, this is due to the relative depth of each, and thus, ease of extraction, of the metals.  The average from 1900 to 2003 was 7.64:1.   Today it is just about 8:1.  As you can surmise, there has been either relatively less silver or relatively more gold taken from the Earth this last century as compared to those previous. 

In-ground geologic reserves are thought to be 7:1.  That is, there is estimated to be seven mineable ounces of silver remaining in the Earth’s crust for every mineable ounce of gold.

 

The Silver:Gold Inventory Ratio

In 1940 the Inventory Ratio was 10:1 and today it is 1:5.  There were 10 billion ounces of known, above-ground, silver bullion in the world in 1940, of which half of that was in the United States.  And at that time there was 1 billion ounces of gold in the world.   Close to three-quarters of that total was located in the United States.  These 1940 numbers roughly parallel the production numbers at that time.

Today there are estimated to be 5 billion ounces of gold in the world; a five-fold increase in only 70 years.  Of that, the U.S. possesses about a fourth of the total officially.  There are now thought to be as many as 1 billion ounces of silver bullion available in the world.  This is on the high side of reliable estimates.  Of this total, the U.S. officially possesses none.   The U.S. sold off the last of its silver stocks by 2003.

So what we have is an industry that is still producing about 8 times the silver by weight as gold but the silver:gold inventory ratio continues to fall.  Inventory ratios have changed drastically over the years; much more so than production ratios.  Gold is hoarded.  Silver is depleted.  Almost every ounce of gold ever taken from the ground is still available in some form and at some price.  Silver is consumed in industry and discarded due to its relative low price and the small amounts used in manufacturing.  It’s not economical to recover or recycle in the vast majority of instances; the one exception being photographic film.  This bodes well for the price of silver in the future.

 

Historic Official Silver:Gold Price Ratio

I say ‘official’ because for much of history governments have fixed this bi-metallic ratio.  The correct ratio is always the Black Market ratio.  The price ratio is the number of ounces of silver it takes at its current price to purchase one ounce of gold at its current price.  The ratio is near 64:1 as of mid-2010.  It has fluctuated in a broad band from 20:1 to 100:1 over much of the last century. The modern low was reached near the peak of the last precious metals bull market.  Silver is now undervalued as compared to the historic record as presented below. 

 

90:1        USA          1991

51:1        USA          2007

17:1        USA          1980

15.68:1   USA          1800

15.5:1      France     1803

14.29:1    England   1806

12.5:1      Greece     323 BC

12:1         Ancient Rome

 

Historic Fluctuations between 10:1 and 100:1 have been seen.  The average has been 32:1 over last 200 years, but only 54:1 since 1970.  The average ratio was 16:1 in the 1970’s.

The price ratio can also be called the perception ratio because it’s the market perception of what the metals are worth relative to one another.  Even though inventory or production ratios may remain static, the price ratio will fluctuate greatly based on market perception of abundance or scarcity between the two.  For example, the Price Ratio was 10:1 in Ancient Times, 15:1 during the Middle Ages, and 30:1 100 years ago.  The Production Ratio remained fairly consistent during these times so there must have been other factors influencing the Price Ratio.

Many investors will play this ratio to their advantage over time, trading silver for gold at the lows and gold for silver at the highs.  It is a viable long-term strategy if your goal is to increase the number of ounces of metal that you own.  That should be your goal.

 

The Silver:Gold Price Ratio in Precious Metal Bull Markets

When the Price Ratio falls, both metals tend to do well.

Silver tends to underperform gold during the initial phase of a rally, and vastly outperform it during the late stage.

History shows silver outperforming gold as the precious metals market nears a peak.  In other words, before gold has hit its high, the silver:gold price ratio will swing dramatically in favor of silver (fall).  This is what happened in the late 1970s.

Watch for this to occur again as we near a peak in gold.

 

 

Stock to Flow Ratio

The Stock-to-Flow Ratio is the ratio of the amount of available inventory to the amount of annual consumption.

There have been some 160,000 tonnes of gold mined in history (by most estimates) versus, say, 2400 tonnes produced annually.  Gold’s Stock-to-Flow Ratio would be 66.67:1 using these numbers.  There is one ounce of gold produced for every 66.67 ounces already above ground and hoarded.

Gold has the highest stock to flow ratio of any commodity which makes it ideal for use as money.   Gold is accumulated.  Other commodities are consumed. 

Most commodities have Stock-to-Flow Ratios measured in days, weeks, or months (oil, corn).   Silver’s ratio is  ~1.5:1.  There are some one billion ounces in world inventory and some 667 million ounces mined annually, all of which is consumed (and then some).

Gold’s Ratio is rising.  Silver’s is falling.  Every year there is more gold added to world stockpiles.  Every year the world uses more silver than is mined.  The excess must come from inventory.  Silver inventory had been declining for decades.  The situation in gold can continue forever.  The situation in silver cannot.

 

 

This material may only be copied or reproduced with permission of the author.

About the author:

Jerry Western is author of the newly available work,

Got Gold?  Get Gold.

A Book on How to Protect your Wealth with the 21^st Century Gold Rush and

a Layman’s Guide to Riding the Golden Bull and the Silver Stallion.

 

Jerry also provides a Model Portfolio Service listing his top Precious Metal picks and weighted rankings.  The portfolio normally contains 18 to 36 companies.

Ordering instructions are available by e-mailing westernoutlook@gmail.com with either the word  ‘gotgoldgetgold’ or ‘peek’ in the subject line.