The gold-silver ratio climbs to its highest level since 1990
The United States entered a recession in 1990 that lasted 8 months through March 1991.
The end of this recession marked the peak of the gold/silver ratio and while we await Thursday’s second quarter GDP numbers to confirm a technical recession, the gold/silver ratio has bounced back to those levels – the gold tip before COVID, this is the ‘cheapest’ silver has been compared to gold since February 1991…
in simple words, as SchiffGold.com recently noted, Historically, silver has been extremely undervalued relative to gold. At some point you should expect this gap to close.
In the summer of 2019, the silver-to-gold ratio climbed to almost 93:1 and by the start of the pandemic, it had skyrocketed to over 100:1. But when the Fed cut rates and launched its massive quantitative easing program, gold rallied, taking silver with it. Silver typically outperforms gold during a gold bull run. That was the case during the pandemic. As gold rose above $2,000 an ounce, up 39%, silver rallied to nearly $30 an ounce, up 147%.
Meanwhile, the silver-to-gold ratio fell from over 100:1 to just over 64:1, near the high end of historical norms.
With this renewed spread widening, we could be in for another big rally in silver.
Historical, as Mining.com explains below, The gold to silver ratio played an important role in ensuring coins were worth their fair share, and it remains an important technical metric for metals investors today.
This chart shows 200 years of the gold-silver ratio and shows the key historical events that shaped its peaks and troughs.
While gold is viewed primarily As a hedge against inflation and recession, silver is also an industrial metal and asset. The relationship between the two can shed light on whether demand for base metals is increasing or whether an economic slowdown or recession is imminent.
The History of the Gold to Silver Ratio
Long before the ratio of gold to silver was allowed to float freely, empires and governments set the ratio between these two metals to control their value currency and coinage.
The earliest recorded fall in the gold/silver ratio dates back to 3200 BC. when Menes, the first king of ancient Egypt, established a ratio of 2.5:1. Since then, the ratio has only seen the value of gold rise as empires and governments become more comfortable with the scarcity and difficulty of producing these two metals.
The Beginnings of Gold and Silver
Ancient Rome was one of the earliest ancient civilizations to establish a gold-to-silver ratio, established in 210 BC. As low as 8:1 began. Over the decades, varying inflows of gold and silver from Rome’s conquests caused the ratio to fluctuate between 8 and 12 ounces of silver per ounce of gold.
Until 46 BC Julius Caesar had established a standard gold to silver ratio of 11.5:1 just before raising it to 11.75:1 under Emperor Augustus.
Over the centuries, ratios around the world have fluctuated between 6 and 12 ounces of silver per ounce of gold, with many empires and nations in the Middle East and Asia often valuing silver higher than their Western counterparts and therefore having a lower ratio.
The Rise of the Fixed Relationship
In the 18th century, the gold-silver ratio was redefined by the US government Coinage Act of 1792 who set the ratio to 15:1. This law was the basis for US coinage and defined the value of coins by their metallic compositions and weights.
Around the same time, France had adopted a 15.5:1 ratio, but neither of these fixed ratios lasted long. The growth of the industrial revolution and the volatility of two world wars led to massive fluctuations in currencies, gold and silver. By the 20th century, the ratio had already reached highs of around 40:1, with the onset of World War II pushing the ratio further to a high of almost 100:1.
More recently, in 2020, the ratio hit new highs of more than 123:1 as investors turned to gold as a safe haven amid fears of a pandemic. Then, as the gold-silver ratio plummeted to around 65:1 in the first quarter of 2021, runaway inflation and a possible recession have eased Gold in the Spotlight again, which sent gold higher relative to silver.
Currently, as SchiffGold.com notes, Most analysts believe the Fed will continue its fight against inflation and tighten monetary policy further. As a result, both gold and silver have experienced significant selling pressure despite an extremely inflationary environment and plenty of evidence to support it the economy is fueling.
The big question is will the Fed keep tightening even as it turns out we are in a recession? In the past, the Fed has been quick to step in and prop up a flagging economy. Rate cuts and a return to QE would almost certainly add fuel to the inflationary fire.
Eventually the markets will find out and gold and silver should recover.
That Supply and demand dynamics also look good for silver even with a looming recession. Investment demand has skyrocketed over the past year and supply has fallen. Industrial demand is increasing, driven by the growth of green energy industry. Governments are likely to keep this gravy train going even during an economic downturn. Mine production has been hit hard by closures due to the coronavirus pandemic, but silver production was already declining, with mine production falling for four straight years.
Now could be the perfect time to take advantage of the silver supply.
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