Historically, one of the most widely used (and accurate) tools to value silver has been the gold-to-silver multiple. This ratio tells us how many ounces of silver it costs to buy one ounce of gold. Currently, the gold-to-silver multiple sits at 74; it takes 74 ounces of silver to buy one ounce of gold.
In the chart below, you will see the gold-to-silver multiple plotted from 2005 to present.
From a historical perspective, since 1970, the gold-to-silver multiple has averaged 55.5. That means silver prices would have to rise to $21.00 an ounce today (from their current price of $16.00) for the historical average price relationship between gold and silver to be restored.
Chart Courtesy of www.StockCharts.com
Going back further, the 200-year average for the gold-to-silver multiple is 37. In this case, silver prices would have to rise to $36.00—that’s 125% above their current price—for the 200-year price relationship between gold and silver to be at the restored level.
Mind you, the above calculations do not take into consideration any price movement on the part of gold. If gold prices moved higher, then sliver prices would have to move higher for the historic price relationship between the two commodities to be restored.
Silver Production in Jeopardy While Demand Remains Solid
The lagging gold-to-silver multiple isn’t the only multiple that suggests silver is undervalued. Basic economics say so as well.
As is the case with gold miners, silver producers are also struggling and production is in jeopardy. For example, in Canada, in the first three months of this year, mines produced 97,265 kilograms of silver. In the same period a year ago, they produced 107,859 kilograms of silver—a decline of 10% in the production of silver year-over-year. (Source: Natural Resources Canada, last accessed June 17, 2015.)
It’s basic economics; when prices decline for a commodity, producers and manufacturers have less incentive to produce and manufacture.
On the demand side of the gold supply/demand equation, demand remains strong.
India, the country that competes annually with China for the title of world’s biggest gold importing country, is a huge importer of silver as well. Over the past few months, there’s been a significant increase in silver imports into the country.
The wedding season in India is fast approaching; and as that economy continues to improve, we are looking at India’s appetite for silver increasing.
Where Silver Prices Are Headed
As I have said in these pages before, I like to look at investment when it is down and out. In my books, lack of investor interest, bearishness towards the metal, and depressed prices all qualify silver as a down-and-out investment right now.
In fact, over the long term, I believe silver will provide better gains to investors than gold. Here’s why: for silver to go up to 100%, it will have to go to $32.00—a level that has been seen many times before. For gold to go up to 100%, it will have to go to over $2,200— a level it has never hit.
With all this said, I am paying close attention to the senior silver miners. Although they are not as profitable as they used to be, they have made strides in reducing their costs and improving their core operations. As silver prices start to rise again, the stock prices of senior silver producers could literally take off.