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Gold/Silver Ratio Highest Since 1990s Recession

Tyler Durden's Photo
by Tyler Durden
Wednesday, Jul 27, 2022 - 06:45 AM

The United States entered a recession in 1990, which lasted 8 months through March 1991.

The end of that recession marked the peak of the gold/silver ratio and as we await Thursday's Q2 GDP print to confirm a technical recession, the gold/silver ratio is back up at those levels - ex-COVID's gold spike, this is 'cheapest' that Silver has been relative to Gold since February 1991...


In simple terms, as SchiffGold.com recently noted,  historically, silver is extremely underpriced compared to gold. At some point, you should expect that gap to close.

In the summer of 2019, the sliver-gold ratio climbed to nearly 93:1 and at the onset of the pandemic, it rocketed to over 100:1. But as the Fed slashed rates and launched its massive quantitative easing program, gold rallied and took silver with it. Silver typically outperforms gold during a gold bull run. This was the case during the pandemic. As gold pushed above $2,000 an ounce, a 39% gain, silver rallied to nearly $30 an ounce, a 147% increase.

Meanwhile, the silver-gold ratio fell from over 100:1 to just over 64:1, close to the high end of the historical norm.

With that spread widening again, we could be setting up for another big rally in silver.

Historically, as Mining.com details below, the ratio between gold and silver played an important role in ensuring coins had their appropriate value, and it remains an important technical metric for metals investors today.

This graphic charts 200 years of the gold-to-silver ratio, plotting the pivotal historical events that have shaped its peaks and valleys.

Chart Source

While gold is primarily viewed as an inflation and recession hedge, silver is also an industrial metal and asset. The ratio between the two can reveal whether industrial metals demand is on the rise or if an economic slowdown or recession may be looming.

The History of the Gold-to-Silver Ratio

Long before the gold-to-silver ratio was allowed to float freely, the ratio between these two metals was fixed by empires and governments to control the value of their currency and coinage.

The earliest recorded instance of the gold-to-silver ratio dates back to 3200 BCE, when Menes, the first king of Ancient Egypt set a ratio of 2.5:1. Since then, the ratio has only seen gold’s value rise as empires and governments became more familiar with the scarcity and difficulty of production for the two metals.

Gold and Silver’s Ancient Beginnings

Ancient Rome was one of the earliest ancient civilizations to set a gold-to-silver ratio, starting as low as 8:1 in 210 BCE. Over the decades, varying gold and silver inflows from Rome’s conquests caused the ratio to fluctuate between 8-12 ounces of silver for every ounce of gold.

By 46 BCE, Julius Caesar had established a standard gold-to-silver ratio of 11.5:1, shortly before it was bumped to 11.75:1 under emperor Augustus.

As centuries progressed, ratios around the world fluctuated between 6-12 ounces of silver for every ounce of gold, with many Middle Eastern and Asian empires and nations often valuing silver more highly than Western counterparts, thus having a lower ratio.

The Rise of the Fixed Ratio

By the 18th century, the gold-to-silver ratio was being redefined by the U.S. government’s Coinage Act of 1792 which set the ratio at 15:1. This act was the basis for U.S. coinage, defining coins’ values by their metallic compositions and weights.

Around the same time period, France had enacted a ratio of 15.5:1, however, neither of these fixed ratios lasted long. The growth of the industrial revolution and the volatility of two world wars resulted in massive fluctuations in currencies, gold, and silver. By the 20th century, the ratio had already reached highs of around 40:1, with the start of World War II further pushing the ratio to a high of nearly 100:1.

Recently in 2020, the ratio set new highs of more than 123:1, as pandemic fears saw investors pile into gold as a safe-haven asset. While the gold-to-silver ratio then tumbled to around 65:1 in Q1 2021, runaway inflation and a potential recession has put gold in the spotlight again, sending gold soaring relative to silver.

Currently, as SchiffGold.com notes, most analysts believe the Fed will continue its war against inflation and monetary policy will continue to tighten. As a result, gold and silver have both seen significant selling pressure despite an extreme inflationary environment and a lot of evidence that the economy is tanking.

The big question is whether the Fed will keep tightening even as it becomes more apparent we’re in a recession? Historically, the Fed has been quick to rush in an prop up a lagging economy. Rate cuts and a return to QE would almost certainly pour more gasoline on the inflation fire.

Eventually, the markets will figure this out, and gold and silver should rally.

The supply and demand dynamics also look good for silver even with a looming recession. Investment demand skyrocketed last year and supply is down. Industrial demand is rising driven by the growth of the green energy sector. Governments are likely to keep that gravy train running even during an economic downturn. Mine output was hit hard by shutdowns due to the coronavirus pandemic, but silver production was already on the decline with mine output dropping for four straight years.

Now may be the perfect time to take advantage of silver on sale.

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