The silver-gold ratio has climbed back above 80-1. This has historically signaled silver on sale.
As I write this article, the ratio stands at just over 80:1. That means it takes just over 80 ounces of silver to buy an ounce of gold.
To put that into perspective, the average in the modern era has been between 40:1 and 50:1.
In simple terms, 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.
Here’s some historical perspective.
Geologists estimate that there are approximately 19 ounces of silver for every ounce of gold in the earth’s crust, with a ratio of approximately 11.2 ounces of silver to each ounce of gold that has ever been mined. Interestingly, the silver-gold ratio in ancient Egypt was 1:1.
In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1. France mandated a ratio of 15.5:1 in 1803. Faced with the challenges of a bi-metallic monetary system with fixed exchange rates and the aftermath of a worldwide financial crisis, the US Congress passed the Coinage Act of 1873. Following the lead of other Western nations, including England, Portugal, Canada, and Germany, this act formally demonetized silver and established a gold standard for the United States.
With silver playing a smaller role as a monetary metal, the silver-gold ratio gradually spread.
Since the world went to a total fiat money system, there seems to be some correlation between the silver-gold ratio and central bank money creation. During periods of central bank money-printing, the gap tends to shrink. In fact, it plummeted in the aftermath of the 2008 financial crisis as the Fed engaged in extreme monetary policy.
Currently, most analysts believe the Fed is about to embark on a war against inflation and significantly tighten monetary policy. As a result, gold and silver have both seen significant selling pressure despite an extreme inflationary environment. The markets are already pricing in tightening and the silver-gold ratio is widening.
But the question is can the Fed successfully raise interest rates high enough to stop the inflation train? Or will history repeat with rising rates causing an economic meltdown that causes the Fed to pivot right back to zero percent interest rates and QE?
How you answer that question will dictate your view of the silver and gold markets.
Peter Schiff’s view is that the Fed is picking a fight it cannot win.
If the Fed actually applied the type of monetary cure for this inflation problem, the whole economy would get a whole new disease — because we would have another financial crisis. You cannot fight off inflation by raising interest rates and tightening monetary policy without completely deflating the bubble.”
Of course, when that happens, the Fed will abandon the inflation fight and start setting more inflation fires.
That’s the only policy remedy the Fed has for a recession, for a bear market — it is to create inflation. You can’t fight inflation and create inflation at the same time. So, the markets still haven’t figured out the dilemma that the Fed is in, and that ultimately, even if the Fed starts an inflation fight, it’s not going to win it. It’s going to have to surrender because the collateral damage to the economy is politically unacceptable.”
Eventually, the markets will figure this out, and gold and silver will rally.
The supply and demand dynamics also look good for silver. Investment demand has skyrocketed and supply is down. Industrial demand is rising. Mine output was hit hard by shutdowns due to the coronavirus pandemic, but silver production was already on the decline with mine output dropping four straight years.
Now may be the perfect time to take advantage of silver on sale.