Written by Chris Marcus for the Miles Franklin blog.
With the current gold to silver ratio at approximately 79 to 1 (meaning that for an ounce of gold, you could trade it for about 79 ounces of silver), many are wondering if the ratio will revert back to the often-cited 15 or 16:1. Which would mean that silver would appreciate at a faster rate relative to gold.
But where does this number come from, and will the ratio return to a level of 10 or 20 to 1?
Indeed, prior to 1900, the gold-to-silver ratio hovered around 16. This was likely because many countries were using gold- and silver-backed currencies. For instance, France and the United States (among others) assigned statutory limits on what the ratio could be.
Also, the U.S. Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, which could provide another explanation for the pre-1900 gold-to-silver ratio average.
(gold to silver ratio chart courtesy of Macro Trends)
Although it’s worth noting that the same article also points out that despite the above, the market has regularly diverged from that ratio.
Throughout the twentieth century though, the gold-to-silver ratio has averaged about 47-50 and has fluctuated wildly at times.
In the 1792 Coinage Act, the proportional value of gold and silver was defined as 15 units of pure silver to 1 unit of pure gold.
In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1, which meant that one troy ounce of gold was worth 15 troy ounces of silver; a ratio of 15.5:1 was enacted in France in 1803. The average gold/silver price ratio during the 20th century, however, was 47:1.
In 1787 the United States Constitution established gold and silver as the legal tender of the United States at a floating exchange rate. Then in 1792, Secretary of the Treasury Alexander Hamilton proposed fixing the silver to gold exchange rate at 15:1, as well as establishing the mint for the public services of free coinage and currency regulation “in order not to abridge the quantity of circulating medium.” With its acceptance, Sec.11 of the Coinage Act of 1792 established: “That the proportional value of gold to silver in all coins which shall by law be current as money within the United States, shall be as fifteen to one, according to quantity in weight, of pure gold or pure silver;” the proportion had slipped by 1834 to sixteen to one.
The act also allowed convertibility of the metals based on that ratio.
“Under Sec.14, any person could bring gold or silver bullion and have it coined free of charge, or later for a small fee, exchange it immediately for an equivalent value of coin. The paragraph summary states: “Persons may bring gold and silver bullion, to be coined free of expense.”
So there is historical, fundamental, and political basis for the ratio. Yet how is that all likely to play out given where we stand in the world today?
Perhaps it’s worth distinguishing between what should happen, and what will happen.
Given the depletion of the above-ground stock of silver in recent decades, the growing industrial demand for silver, and the geological ratio of the metals in the earth’s crust, certainly supply and demand would favor that the ratio comes down significantly.
Of course in today’s Orwellian financial markets, there is also the possibility that at any given point in time, the government could come out with a decree of what they feel the ratio should be. And implement it via mandate.
Although I continue to wonder how effective such a move would be if attempted.
A large part of why I invest in gold and silver is because I do believe that the current dollar system is approaching its final break point. And with the current government structure existing solely based on the ability to print in order to fund its operations, when the metals do finally break out, what is the status of the government going to be at that point?
And if the world finally realizes what those who have been studying the Federal Reserve have already discovered, do we reach a point where the government or banks can decree what prices should be, and the market just doesn’t care?
For some that’s hard to believe given the stunning decade of market manipulation we’ve just witnessed. Yet if there is all of that leverage paper gold and silver that is unable to be delivered, whether it happens this year or it takes longer to manifest then I might suspect, there is an imbalance that at some point must be resolved. And if the financial markets fracture at the same time the government is in chaos, we may reach the point where the market will simply not care about any ordained decrees.
If that is the case, then certainly given the fundamentals, a reversion somewhere closer to 15 to 1, as opposed to 79 to 1, seems plausible enough. Although keep in mind that while perhaps it makes sense that the ratio should be around 15 to 1, it has very rarely traded anywhere near that level over the past 100 years. Reminding us that it’s worthwhile to consider the difference between what perhaps should happen, versus what will happen.
Where the ratio goes and how it gets there will largely be dependent upon events that have yet to unfold. And certainly it makes enough sense that the ratio could come down substantially from the current 79 to 1. Should you be interested in swapping gold for silver, Miles Franklin does offer that option. Which you can find out more about by calling 1-800-822-8080.
For whatever it’s worth, I do personally favor silver over gold. With most of my precious metals holdings being in silver, as opposed to just a few gold coins.
So the ratio is an interesting data point to start with, and then continue to think further about. Because while there is nothing to guarantee that there will be a straight line to 15 to 1, there is evidence to suggest that silver is significantly undervalued relative to gold.
My personal feeling is that we are getting closer to the point where both metals begin to move. Which I expect might also begin the adjustment that brings the gold to silver ratio significantly lower.
To buy or sell gold and silver call Miles Franklin today at (1-800-822-8080).
Great column! I know “paper” metals can “break”, and governments can “break”, but can REAL metals “break”- other than be stolen? Isn’t that what wars are really all about?
Thank you Lawrence.
Yes, unfortunately it seems like a lot of wars have been waged based on wealth. Gold Warriors by Sterling and Peggy Seagrave goes into the history about Japan during World War II and uncovers some fascinating information.
Praying that it won’t go down that way this time….