Gold To Silver Ratio Drops As Silver Gains In Value
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One of the most reliable indicators to buy silver is looking at the gold to silver ratio over time. This means dividing the spot price of gold by the spot price of silver. The rule relies on the assumption that there is more or less a fixed amount of gold and silver on the planet. So their relative values against each other should be consistent and predictable over time based on their rarity. Of course there are other ways to value a hard asset, but this is at least one measurable way to do so.
The 20 year average over the last 2 decades for this ratio has been 60 times. In more recent years, ever since mid 2016 the ratio has been growing consistently higher. But this all changed suddenly this month. At the peak of this ratio during the first week of July, the price of gold was US $1,400 per ounce. And the price of silver was $15/oz. This made the ratio about 93 times, the highest it has been in more than 25 years. But soon after the ratio started to shrink dramatically. It wasn’t so much that gold lost any value. But in just 2 weeks since the ratio peaked, the price of silver gained about 6% relative to gold, and now the ratio is sitting at 88 times. This is still much higher than the 60 times long term average. But it’s a signal that perhaps the trend is taking a turn in favor of silver prices.
There are a few potential reasons for the recent increase to the price of silver. One is that production is expected to slow for some silver miners. For example, Fresnillo plc, which is the world’s largest producer of silver from ore had cut its output targets for this year from 58 to 61 million ounces initially, to 55 to 58 million now. This announcement created concerns over less new silver to go around. Another reason could be that prolonged political tensions around the world have made investors more cautious about business opportunities and growth. If governments and central banks around the world were to ease monetary policies then that could create a lot of inflation. By historical standards precious metals are very effective at hedging against money printing and other inflationary situations. Silver is known as the poor man’s gold. Many people who can’t afford to invest in gold coins can simply buy silver instead and get the same kinds of benefits.
One way to take advantage of higher silver prices is to buy shares in silver streaming companies such as Wheaton Precious Metals (WPM). Its business model is to buy silver and gold from other companies that primarily mine for other types of metal. This way Wheaton can access direct exposure to the price of metals without taking on the risk of surveying or setting up mines, which can be quite costly. Over $800 million in dividends have been paid to shareholders to date, equivalent to nearly 40% of cumulative net earnings. So the company is well run and operates with a healthy profit.
But it’s not yet evident that silver prices will continue to go higher. One of the biggest risk to investing in silver companies is the price of the underlying commodity. There are still hurdles for the spot price of silver to go through. Even though the metal is currently trading at a one year high, it still has to break out of its $17/oz resistance level, last seen in the summer of last year. Then after that there’s another resistance at $20/oz, not seen since 2016. But if the price of gold continues to hold its value, and the gold to silver price ratio falls even more, then there’s a good chance this is the beginning of a very sizable rally for silver.
Note: This article originally appeared at Modest Money. The author is Kevin.
Category: Precious Metals
