The ratio of silver to gold is currently around 88 to 1. This means that 88 ounces of silver equal one ounce of gold.
The price of gold in terms of U.S. dollars is currently around $1,573 per ounce. The price of silver is around $17.68 per ounce.
As explained in a recent article appearing on Schiffgold.com, “the average in the modern era has been between 40:1 and 50:1.”
In other words, if the ratio returns to what has been more normal in the past, then we should either expect the price of silver to rise as compared to gold or expect the price of silver to fall less dramatically than gold.
While I think the ratio is a useful tool, it is important to realize that there is nothing set in stone saying that the ratio has to return to these past levels. Times do change.
While both metals have a history of being used as money, silver does not really have much of a role in today’s monetary system. Silver is an industrial metal. Gold can be used this way too, but gold is more unique now in that it is still held by central banks as a form of reserves. Even though gold no longer functions as a direct form of money in most cases, it is still tied to the monetary system, at least indirectly.
Central banks hold gold. I don’t know of central banks holding any silver. Therefore, if there is a major loss in faith in fiat currencies in general, we could see gold do comparatively well to silver.
Gold has seen stronger gains than silver (in dollar terms) over the last several years. I believe part of this is due to the increased demand from central banks. Even though the Federal Reserve has not been a buyer of gold (that we know of), the U.S. government has perhaps played a role in the rise of demand for gold by foreign central banks. When the U.S. threatens other countries and uses sanctions against foreigners, it makes them want to be less reliant on the U.S. dollar. It is not surprising that a country like Russia would want to reduce its dollar holdings and increase its gold reserves.
Metals in a Recession
Even in the short run, I am hesitant to think that silver will do better than gold. We already saw a mostly inverted yield curve in 2019, and the stock bubble is as big as ever. There is a major threat of a coming recession.
Gold and silver tend not to do well in recessionary periods, especially if the recession is not accompanied by high price inflation. This is not the 1970s, or at least not yet.
When there is an economic downturn, people turn to safety and liquidity. If there is relatively low price inflation, then investors tend to seek safety in government bonds. They seek liquidity in cash and cash equivalents.
This is not favorable towards gold and silver. This is why the metals went down in the fall of 2008. They did recover quickly after that, especially when the Fed really juiced up the digital money printing.
I don’t know what the next recession will look like for gold and silver. I expect stocks to fall the hardest. My best guess is that gold will fall a little bit, but then it is likely to go up big in dollar terms once the Fed gets going with its next round of major money creation.
Assuming the metals fall, at least temporarily, I think silver will take a bigger hit than gold. Therefore, for this year at least, I think it is better to be much heavier in gold than silver. I see more downside for silver, while the upside is not much greater.
This will change if and when price inflation becomes a greater threat. If gold starts going up 20% annually, silver could easily be going up 40% or 50% annually.
Silver has a tendency to be more dramatic than gold. When there is a bull market in precious metals, silver will typically outperform gold. But when the pullback comes, then silver can go down big and fast.
I am an advocate of a permanent portfolio. I don’t see anything wrong with holding a little bit of silver, but I think it should be a tiny percentage of your portfolio. I certainly wouldn’t advocate anything more than 5%, and even that would be high.
If you are going to speculate with silver, I just don’t think now is the time to do it. You have to wait for a genuine fear of price inflation in the near future. This shouldn’t be based on your own fear, but rather the general mood of investors and consumers.
Again, the 1970s is a good example to look at when gold and silver ran wild. When you think that price inflation will hit close to double digits within the next couple of years, then that is the time to buy silver. It is also the time to buy gold, but I am assuming that you already own some gold and gold-related investments.