You often hear proponents of silver argue that silver makes a great investment right now because it is cheap compared to gold. The argument goes that since there is approx. 15 times the amount of silver in the earth as compared to gold, than the price ratio between the two should be roughly 15-1 gold to silver. Following this logic silver does appear cheap considering the ratio is currently around 65-1. However, it is not a good idea to make an investment in silver based on this mythical ratio. Why? The ratio has never been followed at least by the market. If you look at a long term gold/silver ratio you will notice that the ratio has never been 15-1. At best it has gotten to around 20-1 and that was only twice in the last 110 years. On average the ratio between gold and silver is about 40-1 and trying to make trades based on this ratio have not proved successful. The only way to trade the spread is to take advantage of truly egregious spreads between the two (around 80-1 or more) and buy silver and short gold. Other than that you are wasting your time with this ratio because it means nothing in the real world. The reason the ratio ever existed was because the US had a bi-metallic monetary standard up until 1873. During this period the US government fixed the price of gold and silver and the ratio was around 15-1. It was only during this time did the ratio every have any real validity. Until the day we return to a bi-metallic standard, the gold/silver ratio will never be 15-1.
Black Swan Insights