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“Why Invest in Silver?” Reason #2: The Gold to Silver Ratio

Many new silver investors have hear of the gold and silver ratio, but do not understand its significance.  Consequentially, Many investors ask, “How could the gold to silver ratio affect the future return on gold and silver?”

 The History of the Gold to Silver Ratio

To truly understand the economics behind the gold to silver ratio, we have to understand the history.  There have been periods such as with ancient Egypt where the gold to silver ratio was 1 to 1.  At other time like during the Ming dynasty, the gold to silver ratio was 4 to 1.  However, when the gold to silver ratio is examined over multiple centuries the average is 12 to 1.  These ratios are not simply a mystical number, but rather are a reflection of the law of supply and demand.  When we examine the silver both in above ground and under ground supplies, we find that there is approximately 10 ounces of silver to every 1 ounce of gold.

 The Impact of the Gold to Silver Ratio

The first time that the gold to silver ratio seriously deviated from the norm in US History was in 1933 when Roosevelt confiscated gold and artificially raised the price of gold by 40%.  After a decade or so the ratio returned back to normal, but in 1973 when the United States went of the gold standard the gold to silver ratio went crazy.  Before 1973, it took roughly 16 ounces of silver to purchase 1 ounce of gold, or a 16 to 1 ratio. Due to extreme manipulation of silver prices, the gold to silver ratio skyrocketed until it peaked at 100 to 1 in 1990.  While the ratio has begun to consolidate back to its historical norm, the ratio today ranges between 55 and 65 to 1.  With gold at $1620 an ounce, silver would be at $135 an ounce if silver were to correct back to its historical ratio!

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