We have said many times that the outlook for silver is bright. The grey metal, unlike gold, is not only an investment vehicle, but also an industrial metal that has growing demand from electronics manufacturers and solar panel producers. This time, let’s look at one of the most important ratios in precious metals—the gold to silver price ratio.
You see, for the most part, precious metals prices move in the same manner: when gold goes up, so does silver, and vice versa. However, despite going in the same directions, the magnitude of the moves in gold and silver prices could differ. We use the gold to silver price ratio to track the divergence of the two metals prices. As you can see from the chart below, the ratio has been rising steadily since 2011.
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In fact, the recent rise in the gold to silver price ratio has been quite dramatic. In the first week of May 2011, an ounce of gold could get you 35 ounces of silver. Today, however, silver becomes much cheaper relative to gold: you can get almost 76 ounces of silver per ounce of gold. That is, the gold to silver price ratio more than doubled in a little over four years!
Sure, silver is a much more abundant metal compared to gold. But scarcity alone does not justify the 76 times price multiple: comparing the actual deposits of silver and gold on earth, the natural multiple is around 17.
Silver: 420% Gain Last Time This Happened
So, the gold to silver price ratio soared. What now?
Well, historical data suggests that when the ratio climbs too high, it would drop and silver prices would soar.
In the chart below, I overlay silver price with the gold to silver price ratio.
Chart courtesy of www.stockcharts.com
As you can see, the rise in the gold to silver price ratio was always followed by a correction in the ratio and a surge in the price of silver. Taking the peak in May 2003 as an example, the gold to silver price ratio dropped from 80 to 50 soon afterwards, with silver price surging 70% in less than a year. Another example was the peak of the gold to silver price ratio in October 2008, after which the price of silver skyrocketed 420%!
Silver: The Oversold Precious Metal
To understand the situation, let’s go back a couple of years. After the Great Recession hit in 2008, the U.S. Federal Reserves unleashed massive quantitative easing programs—printing money to buy assets. Trillions of dollars flooded the asset market and both the stock market and the bond market soared to all time highs.
With astronomical returns in the stock market and the bond market, precious metals did not seem to be attractive anymore. Since 2011, precious metals prices crashed. But not all metals crashed equally: gold price dropped 40%, while silver plunged a more dramatic 70%!
The idea here is that silver is being oversold. And with history repeating itself, be prepared for a big jump in silver prices in the upcoming months.