On Monday, March 25, 2019, the gold:silver price ratio is 1 in 85. A particularly interesting topic of discussion and a great opportunity for GoldRepublic to delve deeper into the numbers. Because what does the gold:silver ratio tell us exactly?
Lets start with some questions:
- In what proportions are the precious metals mined?
- What does the historical ratio tell us?
- What should we think of in regards to the current ratio?
We start by examining the production of both gold and silver.
The precious metals are recovered in significantly different amounts. Last year's production figures were as follows:
This amounts to a ratio of 1: 8,282. In 2018, approximately 8.28 ounces of silver were removed from the ground for every ounce of gold. Historically, there are different metrics that are used, but many people agree that it is somewhere around 1 in 10 - 1 in 15.
Surprising fact or not, we can buy about 85 times as much silver for every ounce of gold at the time of writing.
Monetary History And Industrial Use
Monetary
Gold and silver both have a millennia-long tradition of monetary use. Silver is the same word in 14 languages as money and gold is still held by central banks today as reserves. In the latest Basel III report, gold is even classified as a zero risk asset. Gold is found to be as safe as money. But where central banks do hold gold, they do not hold silver.
Silver was demonetized in large parts of the world in the 1960s. Since then it has disappeared from coins and reserves in central banks have been reduced. Silver officially no longer has a monetary function and hasn’t for some time. However, that does not mean that silver cannot regain that monetary title. We can already see that one of the main reasons for investing in silver has a monetary motive. Many investors think that with rapid money depreciation or hyperinflation, silver will potentially be used again as money again. And we have seen that during the crisis that started in 2008. Silver rose from $12.56 in January 2009 to the April 2011 peak of $48.58. An increase of 387% in just over 2 years. And against what some would find natural when production falls, industrial demand also rose. Using this information, one could come to the conclusion that silver is a bargain right now.
Industrial Application
Gold is only used to a limited extent in industry with around 10-15% of the annual production that was used industrially in 2017. For silver, however, it is a different story. In 2017, just under 60% of all silver demand went to the industry.
Every year, the gap between silver demand and production is between 100 million and 200 million ounces. The above-ground stock of silver is shrinking as a result. And there is no indication that total demand will continue to do anything but rise. With relatively low prices of silver and the thousands of applications for which silver offers a solution growing by the day silver is consumed in huge quantities that cannot be recovered.
To Conclude?
What does that current relationship mean?
The current ratio of gold to silver may seem somewhat out of balance due to the statistics mentioned above. And yet, it has been reality for years. Knowing that, investors should probably apply a long-term perspective. And that perspective shows that although deviations can occur and can last a long time, we always return back to historical averages. In fact, the longer the deviation lasts, the greater the chance of returning to that average. This presents opportunities, but also that the investor in silver should take in to account the time it might take for the balance to be restored.