Historically, silver has been pegged to gold by a ratio of about sixteen to one.

November 16, 2011 – Historically, silver has been pegged to gold by a ratio of about sixteen to one. In other words, it would take sixteen ounces of silver to buy one ounce of gold in Rome, for example. This was never set in stone, but a general guideline that has informed buyers and sellers for millennia. If the ratio fall slightly under the sixteen to one to fourteen or further, it indicates that gold is undervalued or silver is oversold. Conversely, if there is a higher ratio, as there is now, it sets another indication for buyers.

There has been some discussion about President Nixon’s decision to remove the US dollar from the gold standard in 1971 as a disengagement from the gold silver ratio. While it is certainly the case that disengaging the dollar from precious metals made the dollar a wholly paper currency, it does not follow that the paper currency would have the power to affect the relationship between gold and silver.

Gold is far more finite substance, with less of it being available in the earth and less of it having been mined in history. This produces a relative scarcity compared with silver and consequently a higher price. The value of a paper currency cannot affect that scarcity ratio. This is one reason why the gold silver ratio is a very good indicator as to what is really happening in the physical markets beneath the noise of the paper markets.

This morning, with gold trading at $1,775.20 and silver trading at $34.47 an ounce, there is a current silver gold ratio of 51.499.

All indicators, such as low interest rates and negative real interest rates, suggest that gold will gain in value and thus silver is currently vastly undervalued. An analogy would be if, historically, it was worth one cow to buy sixteen sheep and suddenly one cow could buy fifty two sheep. That is the kind of price differential we’re looking at in the gold and silver markets. This suggests very strongly that silver has a long way to go in real terms to catch up to the value it rightly deserves per a measurement that has been good for thousands of years.

Shannon King

Senior Staff Writer –

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