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What Will Become of the Gold/Silver Ratio in 2015?

Precious metals have long been foundational aspects of a well-rounded investment strategy. While most people see precious metals (such as gold and silver) as the main materials for jewelry and coins, they are used widely for industrial purposes. This means their price level can form a powerful indication of the state of certain aspects of a country’s economy.

Gold, in particular, is crucial to the electronics industry, as it plays a major role in technological items and products. According to an article on Forbes, gold serves as an electrical conductor, a corrosion-resistant material, is chemically stable, and acts as a formidable heat shield. Silver, on the other hand, is the best conductor of electrical energy of any element, is the most reflective material, is used in cell phones, solar panels, medicine, jewelry, silverware, mirrors, wire, film photography, and more (www.geology.com). Both of these metals play a vital role in many aspects of industry and production.

The Gold/Silver Ratio

As silver is more abundant, it’s less expensive than gold. Hence, the gold/silver ratio is typically recorded as X/1, where X is how many ounces of silver it takes to purchase one ounce of gold. This ratio becomes integral to an investor’s strategy. As the ratio fluctuates up and down, it indicates the value of silver relative to gold. Therefore, it helps investors determine when it’s the best time to increase or decrease holdings of either metal.

The main aspect of understanding this ratio lies in what makes gold and silver such enticing investments. Gold is a speculative investment as its price is very much related to its scarcity, much like oil. However, gold is non-consumable. Even when it is used in consumer products (like jewelry) it can be broken down, reused, and placed back into the market. Considering other options, this makes it a relatively safe investment. Precious metals also become a more attractive option when currency markets are unstable.

So, by understanding fluctuations in the gold/silver ratio, investors can determine how best to diversify their portfolio to take on an optimal amount of risk.

Variables Affecting the Ratio in 2015

In 2008, after the Lehman crash, the ratio hit a peak above 80 ounces of silver to one ounce of gold, according to Bullion Vault. It then hit a three-decade low of around 30/1 when the price of silver shot up to $50 an ounce in 2011.

Presently, the ratio has returned to within its natural range between 50 and 70. It now fluctuates subtly around 66, according to Metals Focus, a precious metals consultancy specializing in research and reporting on precious metals markets.

The first factor concerning the future of the ratio considers the industrial demand for silver. Bullion Vault states that “the gold/silver ratio is likely to fall because industrial demand for silver – which gold does not enjoy – has recovered.” This fall is anticipated to be propelled by the force of the electronics and electrical sector, and as the overall economy moves completely out of its recessionary relapse.

The next factor concerns global printing of money and its effects. GoldMoney.com founder, James Turk, and the former head of commodities for the Abu Dhabi Investment Authority, John Rubino, wrote a book entitled “The Money Bubble.” They postulate the consistent rise in the price of gold as the printing of money potentially gets out of hand, causing paper’s inherent value to diminish.

According to Arabian Money, silver becomes a substitute for gold when prices go too high, as cited in Turk and Robino’s book. They state that “true silver prices are manipulated by central banks, like gold” but the “price rise from $6 per ounce in 2006 to $49 in 2011 shows that manipulation is not a perfect art.” The ratio of available silver to available gold is 3/1, whereas the price ratio is around 66/1. This establishes an environment where if a rush to buy silver occurs, there is not going to be enough stock to satisfy demand, sending the “price higher and [bringing] its price ratio to gold tumbling back towards its much lower historic levels.”

The authors of “The Money Bubble” conclude that in 2015, at the latest, gold will begin a significant rise in price, causing substitution for silver. Although they do acknowledge the effect the central banks could have on their predictions.

A look at the national debt and its relation to the gold/silver ratio may also provide some useful insight. Since 2001, national debt has had an exponential growth rate at an average of 9.7%. The growth rate for gold has been larger at 18% per year. According to Time and Being, this excess in growth can be attributed to “gold as a competing currency, mining supply is growing little, most governments are aggressively printing money, investors are increasingly interested in gold, and central banks are buying, not selling gold.” As gold correlates closely to national debt, it can indicate changes in prices.

Conclusion

According to these sources, it appears as though the gold/silver ratio will trend towards its long-run levels. However, as these levels haven’t been seen in years, since silver was used extensively in common currencies, it is upon the reader to conduct their own research to determine a sound prediction.

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