Silver escalated in price by 81.1% in the 12 months ending June 30th, 2011 compared to gold’s 19.3%. As such the gold:silver ratio fell from 67: 1 to 44: 1 over that period. This is still way out of whack with the long-term historical relationship between the two precious metals and begs the question: “Is now the perfect time to buy silver instead of the much more expensive gold metal?” Words: 1490
So says Lorimer Wilson, Editor of www.munKNEE.com,(It’s all about Money!), in an article outlining the historical price correlation between gold and silver and what it means for the future price of silver as the gold bull runs it course. Please note that this complete paragraph, and a link back to the original article*, must be included in any article posting or re-posting to avoid copyright infringement.
Precious metal bull markets have 3 distinct demand-driven stages and we are now quickly approaching or perhaps even in the very early part of stage which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. go parabolic) in price.
History Suggests Gold Could Go to $6,228.80 per ozt.
Gold went up 24% in 2009 and 30% in 2010. There are no shortage of prognosticators who see gold going parabolic like it did in 1979/80 when gold rose 289.3% from Jan. 1, 1979 to its peak on Jan. 21, 1980 (and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks)!
A 289.3% increase in the price of gold from the December 31st, 201o closing price of $1420.70 per ozt. (for an article detailing how a troy ounce differs from a regular ounce measurement read this (1) article) would put gold at $5,539.79 per ozt. – and a 289.3% increase from the mid-July, 2011 price of approximately $1,600 per ozt. would equate to a future price of $6,228.80 per ozt.! (More on what that might mean for the future price of silver is analyzed below.) That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don’t seem quite so far-fetched. (Go here (2) for a complete list of the economists, academics, market analysts and financial commentators who maintain that gold will go parabolic to $2,500 -$20,000 per ozt. in the near future.)
History Suggests Silver Could Go to $333.33 per ozt.
Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle along with gold. The 49% increase in silver in 2009, and 83% in 2010 attests to that in spades. During the last parabolic phase for silver in 1979/80 it increased 732.5% in just over one year. Such a percentage increase from the Dec.31, 2010 price of $30.84 per ozt. would represent a future parabolic top price of $256.74 per ozt. – and from the mid- July, 2011 price of approx. $40 per ozt. would equate to a price of $333.33 per ozt.! (For what that might mean for the future price of gold see the analysis below.) Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.
How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship – the correlation – of one to the other over time, the gold:silver ratio. Based on silver’s historical correlation r-square with gold of approximately 90 – 95% silver’s daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver’s price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attest. Indeed, the move from 78: 1 at the end of 2008 to 65:1 at the end of 2009 to 45:1 at the end of 2010 and to 40:1 in mid-July, 2011 attests to the fact that silver is on the move towards the average long-term historical relationship with gold of 16:1.
3–Yr Chart of Gold:Silver Ratio
Let’s look at the gold:silver ratio from several different perspectives:
- In the last 25 years (since 1985) the mean gold:silver ratio has been 45.7:1 and is currently approx. 40:1
- During the build-up to the parabolic blow-off in 1979/80 the ratio dropped from 38:1 in January 1979 to 13.99:1 at the parabolic peak for both metals in January, 1980.
- Were the % increases in gold and silver during the 1970s parabolic phase (289.3% and 732.5% respectively) applied to the 2010 year-end prices of gold and silver ( $1,420.70 per ozt. and $30.84 per ozt. respectively) the resultant prices for gold and silver of $5,530.79 per ozt. and $256.74 per ozt. respectively would equate to a 21.5:1 silver to gold ratio.
- Were the same % increases applied to the mid-July 2011 closing prices of gold and silver of approx. $1,600 per ozt. and $40 per ozt. respectively, the resultant prices for gold and silver of $6,228.80 per ozt. and $333.33 per ozt. respectively would equate to a 18.7:1 silver to gold.
Chart of Gold:Silver Ratio 1981 to Now
Let’s now look at the various price levels for gold and the various gold:silver ratios mentioned above one by one and see what conclusions we can draw.
First let’s use the current ball-park price of $1,600 for gold and apply the various gold:silver ratios mentioned above in approximate terms and see what they do for the potential % increase in, and price of, silver.
Gold @ $1,600 using the year-end 47:1 gold:silver ratio puts silver at $34.04
Gold @ $1,600 using the above mentioned 21.5:1 gold:silver ratio puts silver at $74.42
Gold @ $1,600 using the above 13.99:1 gold:silver ratio puts silver at $114.37
Now let’s apply the projected potential parabolic peaks of $3,000, $5,000 and $10,000 to the various gold:silver ratios and see what they suggest is the parabolic top for silver.
Silver’s Price Range With Gold At $3,000
a) Gold @ $3,000 using the gold:silver ratio of 47:1 puts silver at $63.83
b) Gold @ $3,000 using the gold:silver ratio of 22:1 puts silver at $136.36
c) Gold @ $3,000 using the gold:silver ratio of 14:1 puts silver at $ 214.29
The above analyses bears closer scrutiny. In paragraph six it was noted that “During the last parabolic phase for silver in 1979/80 it increased 732.5% in just over one year. Such a percentage increase from the Dec.31, 2010 price of $30.84 per ozt. would represent a future parabolic top price of $256.74 per ozt.” That price is only slightly higher than the $214.29 per ozt. that would result from a 14:1 gold:silver ratio with gold at $3,000 per ozt.
Furthermore, as can be seen below, the $227.27 that would result from a lesser 22:1 gold:silver ratio with gold at $5,000 per ozt., and the $212.77 that would result with gold at $10,000 per ozt., strongly suggest that a future price for silver at over $200 is well within the realm of possibility.
Silver’s Price Range With Gold at $5,000
a) Gold @ $5,000 using the gold:silver ratio of 47.1 puts silver at $106.38
b) Gold @ $5,000 using the gold:silver ratio of 22:1 puts silver at $227.27
c) Gold @ $5,000 using the gold:silver ratio of 14:1 puts silver at $357.14
Silver’s Price Range With Gold at $10,000
a) Gold @ $10,000 using the gold:silver ratio of 47:1 puts silver at $212.77
b) Gold @ $10,000 using the gold:silver ratio of 22:1 puts silver at $454.55
c) Gold @ $10,000 using the gold:silver ratio of 14:1 puts silver at $714.29
It would appear that, any way we look at it, physical silver is currently undervalued compared to gold bullion and is in position to generate substantially greater returns than investing in gold bullion.
Gold:Silver Ratio Conclusion
History will look back at the artificially high gold:silver ratio of the past century as an anomaly caused by the world being deceived into believing that fiat currencies are real money, when in fact they are all an illusion. This fiat currency experiment will end badly in a currency crisis and when that happens, as it surely will, gold will go parabolic and silver along with it – but even more so as the gold:silver ratio adjusts itself to a more historical correlation.
The wealthiest people in the future will be those who put 10% to 15%  (or perhaps more – much more!) of their portfolio dollars into physical silver today and were smart enough to research and pick the best silver mining/royalty stocks and warrants (see article here ) to leverage/maximize their returns.
Indeed, while gold’s meteoric rise still has room to run, silver’s run is only getting started. Certainly, if the historical gold:silver ratios are any indication, it appears evident that now is the time to buy all things silver.
Titles and Links to Articles Referenced Above:
- What’s the Difference Between 1 Gold Carat, 1 Diamond Carat and 1 Troy Ounce? http://www.munknee.com/2011/03/whats-the-difference-between-1-gold-karat-1-diamond-carat-and-1-troy-ounce/
- Update: These 90 Analysts Believe Gold Will Go To $5,000 ozt. – or More http://www.munknee.com/2011/06/update-these-90-analysts-believe-gold-will-go-to-5000ozt-or-more/
- How Much Gold Should You have in Your Portfolio http://www.munknee.com/2010/09/how-much-gold-bullion-should-you-have-in-your-portfolio/
- The “Secret” World of Gold and Silver Company Warrants http://www.munknee.com/2011/05/the-secret-world-of-gold-silver-company-warrants/