The Gold Silver Ratio (GSR)
Proportional Measure of Value or Treasure Map?
I say both.
For thousands of years, Silver aka “Poor Man’s Gold” has globally been considered a monetary metal or hard currency and is inextricably linked to the ups and downs of Gold, the yellow metal. We’ll save the historical dissertation for another time, but it’s safe to say there is a very strong correlation or basic relationship that exists between these precious metals: when Gold goes up, Silver goes up; when Gold goes down, Silver goes down.
Anyone who has traded or invested in Silver over the past 11 years would likely hasten to add: when Gold goes up, Silver goes up big and when Gold goes down, Silver goes down hard.
Proportional Measure of Value
The Gold Silver Ratio (GSR) is a key technical indicator I monitor closely to help me analyze where the price of silver is in relation to the price of gold to determine whether silver may be overvalued or undervalued.
Simple to calculate, it is the current price of gold divided by the current price of silver. This ratio reflects how many ounces of silver a single ounce of gold could buy. Or, you can look at it as the number of silver ounces required to purchase a single ounce of gold. Either way, it’s the same thing.
As of this writing, Gold is trading at $1657 per ounce and Silver is at $30.40 per ounce basis December delivery. So, the Gold Silver Ratio (GSR)is just over 54.
So, why should this ratio matter to speculators? Well, for both traders and investors when you compare that ratio number in a larger historical context against past gold and silver prices, it can offer you great perspective and potentially great opportunity.
According to various geological sources, the naturally occurring ratio of in our Earth’s crust is approximately 17.5 ounces of silver for every ounce of gold. When Alexander Hamilton was the U.S. Secretary of Treasury over 220 years ago, he helped Congress design and implement a fixed 15 to 1 Gold/Silver ratio to serve as the officially recognized monetary measure:
“And be it further enacted, That of gold and silver: the proportional value of gold and silver in all coins which shall by law be current as money within the United States, shall be fifteen to one, according to quantity in weight, of pure gold or pure silver; that is to say, every fifteen payments, with one pound weight of pure gold, and so in proportion as to any greater or less quantities of the respective metals.”
—The Coinage Act of 1792 (Section 11) – Passed by US Congress (April 2, 1792)
Let’s take a look at a graphical representation of the Gold Silver Ratio (GSR) going back to the mid 70’s:
GOLD SILVER RATIO (GSR) “1974“ 2012 (MONTHLY CHART)
As you can see in the historical chart above, I’ve identified several potential Gold Silver Ratio (GSR)target areas that I believe could eventually play out over the long-term.
Like the precious metals’ prices themselves, the Gold Silver Ratio (GSR) has certainly fluctuated over the past 200 years and recent analysis places its average near 37 to 1. So, if the current GSR is sitting at 54, the price of Silver would appear to be undervalued to Gold and in my opinion has a lot of room to run to the upside. (GSR decline = rise in price of Silver relative to Gold). For the record, I am of the belief that the Gold Silver Ratio (GSR) will surprise to the downside, eventually returning to its roots somewhere in the teens…
Some of the world’s preeminent investors/money managers who specialize in long-term equity allocations to Silver, the Great White Beast (such as Eric Sprott & John Embry “Sprott Asset Management”), have shared similar targets for years, envisioning a far deeper decline in the Gold Silver Ratio (GSR) into the single digits. Preposterous for many and maybe for most to believe â€“ but it is not without historical precedent…
5 To 1 (No One Here Gets Out Alive)
No, not The Doors’ final track on their Waiting For The Sun album (1968)….
5 to 1 is the Gold Silver Ratio (GSR) the infamous Nelson Bunker Hunt believed would ultimately come to pass.
|GOLD SILVER RATIO (GSR) – POTENTIAL PROJECTED GOLD/SILVER PRICE RANGES (LONG TERM)|
|PRICE OF GOLD||$1,657||$1,700||$1,800||$1,900||$2,000||$2,500|
|GSR@ 54.5 – CURRENT||$30.40||$31.19||$33.02||$34.86||$36.69||$45.87|
|GSR@ 45 (TARGET #1)||$36.82||$37.77||$40.00||$42.22||$44.44||$55.55|
|GSR@ 32 (TARGET #2)||$51.78||$53.12||$56.25||$59.37||$62.50||$78.12|
|GSR@ 17 (TARGET #3)||$97.47||$100.00||$105.88||$111.76||$117.64||$147.05|
|GSR@ 5 (HUNT’S TARGET)||$334.00||$340.00||$360.00||$380.00||$400.00||$500.00|
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