Should You Invest in Silver Using the Gold-Silver Ratio?

Gold and silver, the world’s favorite precious metals, have a sixty century history of surviving financial collapses, raging wars, and economic chaos. Even the words for “money” and “silver” are the same in over a dozen languages. Six thousand years of history indicates that precious metals will continue to be used as a means of exchange for the foreseeable future, especially if fiat currency becomes worthless.

The most popular silver investment vehicles are 100 ounce and 1,000 ounce bars as well as one ounce bullion coins. And the most popular bullion coins are Silver Eagles.

Is Silver a Better Investment than Gold?

During bull markets in precious metals silver has almost always produced higher percentage increases than gold. While gold has doubled in some of the upward moves silver has, at times, tripled or quadrupled in price.

It also has considerably more industrial applications than gold, which helps to underpin the price of silver.

In the past several decades the industrial demand for this metal has exceeded mine production as well as the secondary recovery. Above ground supplies have dwindled as well. From this perspective, things look quite bullish for the lower-priced alternative.

The Gold/Silver Ratio

If you were to research precious metal stocks you would probably find that both gold and silver miners convert precious metals prices into the cash equivalent of its byproduct. In other words, gold miners will convert their silver byproduct into the dollar equivalent of gold ounces while silver miners would do the converse. So silverminers would convert their byproduct gold production into ounces of silver and then convert the gold into the dollar equivalent of silver.

Over the past several decades this ratio has consistently been approximately 55:1. It is a well established equivalent.

When the ratio has increased the price of silver has invariably gone up. Conversely, when the ratio has decreased the price of silver has gone down. Relatively recently gold has traded at 84 times the price of silver while at other times in recent history silver has traded at 1/45 the price of gold.

What is the Gold/Silver Ratio Today?

On March 15, 2010, gold was trading at $1,104.50 per ounce while silver was trading at $17.03, yielding a ratio of close to 65:1. Should gold remain the same and should silver return to the 55:1 ratio, the price of an ounce of silver would be just over $20, seventeen percent higher than it is today. If the 45:1 ratio (established in 2006) returned then the spot price of silver would be more than $24.50 per ounce.

Of course the choice of what to invest in and how to determine when you should invest is totally in your hands. However, some successful investors have been using the gold/silver ratio to increase their precious metals holdings.