When this article was originally published, the gold-to-silver ratio stood at approximately 66 to 1. Although that was not the widest gap ever recorded between the metals, it was more than four times the gold-to-silver ratio Congress set in 1792 at 15 to 1. It was nearly four times the 17:1 ratio that appeared briefly in 1980, more than twice the April 2011 ratio of 31 to 1, and well above the average ratio reported for the 20th century, 47 to 1. The original article reviewed those historical comparisons and gave three reasons it believed the then-current ratio of 66 to 1 would probably narrow over time.
History
Before considering the article’s outlook for later gold-to-silver ratios, it is useful to review the historical circumstances behind earlier levels. Silver advocates often cited a historical ratio of 16 to 1 as part of their case for silver. The original article described silver as an excellent investment and recommended it, but also argued that telling investors the ratio would return to that level could be misleading. The ratio of 15 to 1, enacted in 1792, was a government-established fixed rate rather than a market-set relationship. As the original article noted, after the price of gold spiked 43% in one year following removal from the gold standard in 1971, a fixed rate did not necessarily reflect free-market value. Likewise, the comparable ratio seen in 1980 was attributed to the Hunt Brothers’ effort to corner the silver market. Silver climbed sharply to $50 per ounce, then fell after COMEX changed its margin requirements and the Federal Reserve raised interest rates.
Mining Output
Although Atlanta Gold & Coin considered 15:1 gold-to-silver ratios unlikely in the near term, the first basis for expecting the ratio to decline from the levels then prevailing was mining production. Each year, miners produced an average of about 700 to 800 million ounces of silver. The Silver Institute reported that 787 ounces of silver were mined in 2012. By comparison, yearly gold output was estimated at roughly 2,500 tons, equivalent to about 80 million ounces. Because annual silver production was roughly ten times annual gold production, the differing availability of the two metals was one reason Atlanta Gold & Coin expected the gold-to-silver ratio to narrow from its then-current level.
Use & Availability
At publication, Annual gold and silver production may have seemed surprising, but the original article explained that those figures did not provide the full picture. Approximately 50% of silver was used industrially and was not recoverable. Gold differed because its industrial use was limited, at approximately 10%. Most gold mined throughout history remained above ground and available, while approximately 50% of silver was reported lost each year. On that basis, the article placed the available-silver-to-gold ratio at roughly 5 to 1. At that level, even the historical ratios above, including 15 to 1, appeared low. The article nevertheless said investment demand for gold and silver varied substantially, and treated that difference as the main explanation for the gold-heavy ratio.
Investment Demand
The original article said that narrowing the gap between gold and silver required investment demand to rise from the levels reported at publication. According to Gold News, coins and medals represented 9% of silver use in 2012, while net investment represented 15%. This contrasted with gold investment demand of 40%, according to Wikipedia. The article suggested Wikipedia’s estimate was probably understated, citing China’s record gold imports in 2013 and strong central-bank demand, particularly from emerging markets. It also reported that 2013 was a banner year for American Silver Eagle sales, at roughly 43 million troy ounces, as covered in a previous piece. Even so, the article said silver needed stronger, sustained investment demand to gain relative to gold. It identified rising interest in both metals in China and India as one possible support, noting increased demand in especially from India, where the government had imposed high taxes on gold imports. The article expected continued global demand, especially in the Far East, to support silver prices.
Summary
In summary, the original article considered a return to gold-to-silver ratios in the 16 to 1 range highly unlikely. It nevertheless regarded a contraction over time from the ratio reported at publication, 66 to 1, as possible and quite probable. The stated reasons included annual gold and silver production, the portion of silver lost each year through industrial use, and increased investment demand in the United States and abroad. The article characterized global investment demand as the most important factor and predicted that it would reduce silver volatility and allow silver to outperform during the next gold-and-silver bull market.
