Why The Gold/Silver Ratio Tells Us Silver Is Undervalued

One must look at the historic, or true ratio of 16:1, also noted as 16, meaning that 16 ounces of silver would buy one ounce of gold. This ratio was originally created based on the supply of silver and gold from the earth. This is not to be confused as the current trading ratio, which is merely a representation of current trading prices, which in itself is often a definition of the undervalued metal.

During the most recent recession, the gold silver ratio hit 84.4, its highest level in four years. Currently the ratio is around 50, this signifies an extremely overvalued gold to silver ratio, although working its way to the true ratio. This in itself represents a definite time for investors to buy silver bullion. Sure enough, investors who trusted this ratio profited from the eventual return of the gold silver ratio to more normal levels as the recession waned in 2009 and 2010. This has been a pattern historically, especially over the last decade with the main events causing market volatility being the dot com and real estate bubbles both bursting.

Should I Buy Silver?

Many investors ask the question, “Should I buy silver over gold?” Gold always takes the headlines, and very few people are educated about the history of the silver gold ratio, or even what securities to purchase in order to buy silver bullion or a derivative thereof. The short answer is to watch the silver gold ratio, and when it stretches far from its historical average, especially in times of market volatility, an investor may be better off buying extremely undervalued silver. As the two commodities tend to rise in tandem with each other after splitting, investors are in a win win situation, but should be taking full advantage of the knowledge they have.

Especially with gold being unable to sustain its current growth rate, and receiving those gains from many countries such as China announcing very large, but one time, purchases of gold bullion, the time is ripe for a silver comeback. The ratio tends to correct itself quite violently, making getting in early essential. However, if history is any indication, any investor who does his or her homework and correctly places their assets to take advantage of the current economic environment will probably be invested in silver bullion.