Silver price forecasts are decidedly bearish as of late, but the value ratio of gold to silver indicates we may be in for a surge in silver.
What is the gold-silver ratio? Simply put, it’s the amount of silver required to purchase an ounce of gold. When the ratio is high, the general consensus is that it’s a good time to buy silver. When low, it’s gold that is your best bet. At the moment, all historical indicators suggest that silver is due for an upswing.
Since 1900, the gold to silver ratio has averaged between 47 and 50. Historically speaking, the natural equilibrium between gold and silver prices has hovered in the range of 1:16. If the ratio were to return back to its historical average, we would see silver prices around $64.00 per ounce.
The price ratio was kept stable before 1900, floating in the range of 16. The reason for this is simple: as many countries, the United States had gold-backed currencies and controlled the ratio by legal means. Following the U.S. abandonment of the gold standard in 1971, that ratio became increasingly more volatile.
The price of gold and silver skyrocketed in 1980, with the ratio at times slipping to 17. Gold surged in value by 50% and silver by 450%.
Translation: in times of economic volatility, the prices of both precious metals tend to rise dramatically. And when they do, the natural value ratio tends to settle in the range of 16-17.
Virtual currency can be manipulated, while physical items with limited supply cannot be. Because precious metals such as silver and gold are scarce and finite, their value is determined by supply and demand. Governments can’t simply print more gold or silver. In the event of an economic collapse, where our financial system would render paper money worthless, day to day transactions would turn to a barter system.
Gold has always been the commodity to store great amounts of wealth in. But it isn’t the best option for small exchanges. While the yellow metal has a high value-to-weight ratio and is impractical for daily transactions, it’s not at all unreasonable to carry a few ounces of silver on you to pay for small transactions.
Silver is a valuable industrial metal, with specific and unique physical properties. It is more conductive to heat and electricity than any other metal, making its industrial applications nearly limitless. As a vital component in solar panels, silver is set to piggyback on the exponential rise in solar power generation. Its antibacterial properties have long made it a sought-after material for medical equipment.
If You’re Not Watching Silver Prices Now, You’ll Hate Yourself Later
At the moment, silver is highly undervalued relative to gold.
The central question that silver bulls and bears are debating at the moment is where exactly the gold to silver ration is heading. Some analysts contend that we have reached the upper limits, and value can’t be extended any further. What this essentially means is that the ratio will likely shift back to its historical average, and will begin tightening back down soon.
The silver to gold ratio has averaged approximately 55 since the events of September 11, 2001. After having hit 77 in 2014, the trend has been a gradual reduction as historical forces draw it back to a natural equilibrium.
As the ratio tightens, the value of silver increases relative to gold, and many experts point to the recent average of 55 as the likely destination. While the prevailing sentiment is that silver prices may not yet have reached their bottom, they are definitely much closer to bottoming out than hitting their ceiling.
Any investor would be wise to slowly build up a respectable amount of silver in their portfolio, hedging on what has been historically proven to be silver’s eventual rise in value.