The value of gold and silver bullion has generally risen and fallen in relative tandem over time; where gold goes, silver follows. For those who follow the gold and silver markets, this can feel satisfying because it makes knowing the relative value of each to roughly gauge simple, but on further inspection, confusing once you begin to understand their different uses in the wider market.
To really get clarity on the relative value of both gold bullion against silver bullion, we need to look into the question of ‘What is the gold silver ratio?’ How it has arisen and its behaviour tells us more of how to understand pricing.
Essentially, the ratio is a calculation employed by investors to assess the best time to invest. The ratio reflects the weight of silver it takes to purchase one ounce of gold. The calculation for it involves taking the market price of gold, then dividing this by the price of silver. At the moment, this is relatively high, meaning it takes more silver to buy an ounce of gold, but this has not always been so.
Historically, silver was under-valued by the Spanish two centuries ago, according to some industry commentators, in order to maintain their power on the world stage. This left a legacy from which silver has since been catching up they argue.
For most of the nineteenth century, silver bars were valued at around 14-16 times vis a vis purchasing gold bullion, a low ratio. During the twentieth century, volatility began to enter the markets. In 1938, against the outbreak of war, the gold silver ratio hit its peak for the 20th century at a 98:1 ratio, only to slide back dramatically in the decade following. Since 1978, around the time of the dollar being unpegged from ‘the gold standard’, the ratio has oscillated quite dramatically, rising steadily in the 1980’s, then becoming somewhat unpredictable since, rising and falling between around 40:1 to as high as 80:1. This variation reflects a variety of issues at play, not least the re-evaluation of silver as a commodity in relation to gold.
Nowadays, we cannot survive without silver, given that much of our technology would be redundant without it. Silver is a highly versatile metal and industrial demand is increasingly contributing to its scarcity. It is not surprising, therefore, that we see the gold silver ratio vacillating dramatically, as the variables considered in silver’s valuation shift in significance over time.
By 2014 the gold silver ratio was at 66:1 and continued to climb in 2015; based on spot prices of gold bullion and silver bullion, the ratio reached 72:1 last year. This, together with inflation fears, currency devaluation, uncertainty in traditional investments and fears of world debt has made silver bars and related assets attractive as an investment for people interested in precious metals as a source of future security.
What Is The Gold And Silver Ratio Likely To Do In The Future?
According to Goldcorp Inc., one of the world’s larger producers of gold, there is one gram of silver for every 12.5 metric tons of earth, versus one gram of gold for every 250 metric tons. Assuming this is correct, together with other factors at play in the world, one might expect that the real ratio of gold to silver could be closer to the historical average, perhaps around 20:1.
Whilst we see silver prices moving up and down with economic events happening around the world, some of this volatility is also due to it not being bought and sold as much as gold bullion, for instance. It is perceived to be of less value, so the market is significantly smaller, making any sudden changes in circumstances have even more impact. (Compare the size of a splash made by dropping a stone into a puddle, versus a pool, for instance.)
Nevertheless, when uncertainty hits the world economy, as it has of late, gold and silver bullion are both perceived as offering greater security. In recent years, demand for silver has outstripped supply, interestingly, by as much as 103 million ounces in 2013, the third year in a row there was just not enough silver available to satisfy buyers.
According to Thomson Reuters GFMS’s 2014 Silver Survey, of the 1.1 billion ounces purchased globally in 2013, 245.6 million came from silver bullion and coins and the larger bulk of demand for 586.6 million ounces, came from industry.
Increasingly, silver is playing an important role in the internet of things and the emerging ‘smart clothes’ trend. Sports technology companies are developing wearable technology and smartphone apps to track physical activities, heart rate, calories ingested and burnt off, plus other biometric feedback tools to monitor our well-being whilst on the go are linked to the tech built into sports and day wear. This industry alone is set to create greater demand for this precious metal in future, aside from traditional industry demand potentially increasing alongside emerging economies.
Whilst the gold silver ratio seems high now, prices of silver bars and coins look likely to increase considerably in the future, given changing perceptions and increasing demand impacting this ratio.
Those looking at the long term building of their investment portfolio would benefit from observing these emerging trends in this metal’s popularity and to evaluate where one sources one’s assets, if seeking to own more tangible silver bullion, for instance.
It is perhaps more important than ever to remain informed about what is happening in the bigger picture, which can trigger significant price changes. The Royal Mint newsletter helps our readers learn more about the gold and silver bullion market and the value of Royal Mint bullion products versus comparable gold and silver products. Why not subscribe below to continue educating yourself about silver and gold so you are prepared for future market developments?