An important instrument that investors use in determining the value of silver is the silver to gold price ratio. With the help of this they can see which one of the two is under valued and which one is over valued. It is believed that throughout the recent history ratio between these two metals was about 15:1 in favor of gold, this means that there was 15 ounces of silver produced for an ounce of gold, which makes sense because gold is a more scarce metal then silver is. Something similar is being done with the price ratio today, it’s being looked as a measure of demand for silver and it can be used in order to see to some extent what kind of price silver will have.
Calculation of silver to gold price ratio isn’t that difficult and you do it by dividing price of gold with the price of silver. Since gold costs a lot more than what silver costs you will get a high number, at least you will today.
Current price of gold is 1738$ and silver is 33$, and when you divide these two, you get 51, which means that the current ratio of silver to gold price is around 51:1 in favor of gold. In the beginning I mentioned that the historic ratio between these two metals was 15:1, we’re here not talking about price ratio, but rather the ratio of production that silver and gold had since the dawn of time. After all there were no dollars, oe currencies back in the day, at least not as complex like the ones that we have now, and gold had different roles in the past which gave it different value. Majority of western countries are ignoring silver and they are ignoring it because of gold. This is what’s causing the low price of silver, because when you have a look at the availability ratios of silver to gold, please note not price ratios, you will see that the 51:1 difference in price isn’t at all justifiable. Production ratios today, production, which has the biggest influence on the price of a certain commodity is only 9:1 in favor of gold. This means that for every ounce of gold, 9 ounces of silver are extracted from the ground. If we use the production ratio in order to determine the price, difference in price wouldn’t be that big. That’s the damage which the governments of the world have done and are still doing to silver and its value by constantly focusing on gold. Such intense focus of not just governments, but also from investors who are following the governments lead and are also buying gold increases demand for gold significantly and that’s what keeping the price high, coupled of course by the scarcity of the metal.
Part of the reason why governments and the investors are favoring gold more is because gold was once used as a currency standard, it was representing value which was written on money, in other words it was used to back up currency. Then the US stopped using this gold standard, and with the US so did the rest of the world, in order to increase the money supply. So now gold isn’t giving value to the money, but rather all the available goods and services out there. Whenever new commodities are available on the market it’s necessary to create new money in order to represent that value. If the creation of the money goes unchecked, then we have inflation, which means increased money supply without stuff to back it up. Once the too much money is created it loses value and purchasing power of the population drops. That’s exactly what people and governments are trying to avoid by preferring gold. They think, and rightly so, that gold will always be valuable, even if the currencies becomes useless, and you’d need 1 million dollars in order to buy a loaf of bread, if you have gold you can use that to pay instead. That may be true, but in such a situation people may be reluctant to give basic necessities of life like food and water for anything, because themselves would be considered to be gold, we are here talking about the dooms day scenario. What some politicians and economists are talking about lately is that we should once again return to some kind of gold standard for backing up currency, if that really happens, the the price of gold would skyrocket, that’s why people and countries are interested in it more.
Now back to silver and how you can find some clues about it’s future value in the price ratios. If the gold price goes up, in order to keep the ratio silver prices usually increase also, unless there is some kind of reason, like a large deposits of silver being found somewhere. If the production numbers stay the same, and if the gold price goes up, price of silver will follow suite, and if what some people are predicting is true, that price of gold bullion will reach 3000$ in the near future, price of silver will go up to 80$ per troy ounce. Such an increase shouldn’t be that surprising, especially when you take into account the previous mentioned production numbers of these two metals where the ration is only 9:1 in favor of gold, and when you realize that emerging markets will be needing more and more gold and silver for industry, cosmetics or for the use in trading. It’s quite possible in fact that the price of silver will break the ratios and reach even higher prices, around or over 100$, so making an investment in silver might not be such a bad idea. This metal is very cheap, so it’s more easily obtainable to a larger number of people,, and even if the price of it doesn’t go up immediately after you buy it will sometime down the road. Markets will one day have to correct this great wrong which was done to silver, stop ignoring it and give it the price which it just deserves.