The Gold/Silver Ratio Strategy & The Case for Silver

March 5, 2003

Ahh, reality is stingy, and forces us to make choices. If you stop at McDonald's for lunch you can't eat at Burger King at the same time.

Investors face the same choices. If you spend all your money on gold, you won't have any left for silver. Which should you choose? The one that will rise fastest and farthest. I believe that will be silver, but how do we make that decision? Is there some measure, some clue other than our bald opinion?


Throughout history silver has served mankind as the primary monetary metal. However, unlike fellow monetary metal gold, most silver use is non-monetary. This industrial demand for silver is quirky. In most applications only a very little silver is needed, so silver contributes only a tiny fraction to end-product cost. For example, the amount of silver on printed circuit boards contributes only pennies to a computer's cost. Given this quirky demand, unless silver's price skyrockets, higher prices don't discourage use.

There's another quirk that keeps silver demand strong in the face of rising prices: its unique properties. In most applications, there is no good substitute for silver because nothing else acts quite like silver. For instance, it is the most electrically conductive metal, so the only near substitute in printed circuit boards is - gold, which is even more expensive. In some applications, like photography, there is no substitute at all, because nothing else reacts to light like silver salts. To replace silver in photography requires a completely new technology.1

So silver demand doesn't drop much when prices rise (demand is price inelastic). Moreover, the silver bull that peaked in 1980 scared silver users so badly that over the next two decades they drastically reduced the amount of silver used . They figured out how to get more work out of less silver, but most of those one-time reductions can't be quickly or easily repeated. Usage has been squeezed down about as low as it can go in the short run.

Nor does silver production rise step for step with price. Obviously developing a new mine or re-opening a mothballed one takes quite some time, from months to years. Worse yet for silver supply, 75% of silver comes as a by-product of copper, lead, zinc, or gold mining. All these base metals stand in oversupply at low prices. Even if silver soars, no miner in his right mind will turn out tons of unprofitable copper, lead, or zinc just to profit from a little by-product silver.2 Open primary silver mines are very rare, and realsilver companies, miners who draw a significant part of total revenue from silver, are even rarer.


The high prices in 1980 brought lots of silver to market in the following years, and left a big surplus to work off. Beginning in 1990, however, the world began using more silver than mines and recycling produced. By the end of 2001, that shortfall had eaten up nearly 1.5 billion ounces. Since 1990 fabrication demand has averaged 156% of yearly mine production. For every ounce of silver the mines produced, industry consumed one and a half ounces of silver.

Meanwhile demand for silver keeps on rising - even for photographic silver. Demand rose from 513 million ounces ("Moz") in 1985 to 880 million ounces last year.

But in spite of production shortfalls year after year, silver's price remained almost flat in the 1990s. Strange - where did all that silver, 1.5 billion ounces, come from? Some say a conspiracy exists to suppress the silver price, and that may well be. I don't doubt the shortfall has been papered over with derivatives, leasing, and futures. All the same,eventually the price must rise as demand grows and supplies shrink. If a conspiracy has tried to suppress silver's price, so much the better. When they lose control (as they inevitably will), the price will surge even farther than natural forces alone would have sent it.


Keep one thing in mind: the key to the silver price is monetary demand. Other categories of demand alter only slowly over time due to technological or economic changes. Supply-demand imbalances in commodities can persist for a surprisingly long time without moving the price sharply. In the past decade, the price of silver has been practically flat, with a few spikes, because monetary demand has been absent. Strong, sustained silver moves occur when many people decide suddenly they want silver because it is money. Today, when stocks, currencies, bonds, and other paper assets have begun to disappoint investors, investor attitudes are shifting. What begins as a trickle ends as a tidal wave when the panic peaks. When public revulsion at the US dollar begins, the tidal wave will become a tsunami. Silver, far more volatile than gold, will benefit most.


In the 1960 - 1980 precious metals bull market, gold rose from $35 to $850, a 2,429% increase. At the same time silver rose from 90 cents to $50, a 5,556% increase. Silver rose 2.3 times as fast as gold.

What is the obvious reason for silver's greater volatility? Compared to gold silver is atiny market, so the same amount of money drives silver much higher. That's why you expect to see silver rising faster than gold in a bull market - the ratio ought to be trending down as both metals rise.

Will history repeat itself? Yes, I think that silver will again outperform silver.


Today's rising ratio does not prove that I have been wrong the past few years to recommend buying a large silver component. Just the opposite: silver is becoming a better and better buy against gold.

When you walk into the grocery store and they are offering the usually more expensive Community Club coffee on sale, do you buy it or Folgers? No choice there, right? Well, silver is on sale against gold. We have been given more time to buy silver at lower prices. In the last precious metals bull market, silver lagged gold about three years, and then passed gold without ever looking back. If silver rises faster than gold, we'll get a lot more bang for our buck - and end up with more ounces of gold as well.

I'll be first in line to admit that the gold/silver ratio chart has been very, very hard for me to interpret lately - maliciously tricky.

Last July the ratio appeared ready to break down from a five year correction uptrend, when suddenly it shot skyward. At that point I projected at top around 77:1, later 79+. It continued up to 74.07 (10 Oct. 02), then seemed to be forming a head and shoulders top.

Had it changed directions again? Right when it seemed ready to break down in December, suddenly it shot skyward again. On February 7, 2003 the ratio hit 79.6, traded sideways a few days, then dropped all the way to 74.9. The 74.5 level, which was formerly resistance, is now support. That is the first level to watch for a ratio breakdown and change to primary downtrend. Then the ratio must confirm by dropping through 70.0, 62.5, and, finally, 59.5. A head and shoulders top seems to be building with a neckline at 69.5, the top of the shoulder(s) at 74.50, and the top of the head above 79.


Over the years markets tend to return to their mean or average values. However, as they correct they also tend to overshoot the mean, swinging like a pendulum first too far to one side, then too far to the other.

Based on year end average prices, the 1792-2002 mean ratio is 31.32. If the ratio merely returned to that mean over the bull market's course, silver would rise about 2.4 times faster than gold. However, based on the extreme ratio swings of the last 125 years, and the ratio's drop in the last precious metals bull market, I believe it is safe to speculate that the ratio will drop much, much lower than the 200 year mean. In fact, my target is 16:1, the bottom of the last bull market.

What makes the ratio work? Why would it return to the old monetary ratio at 16:1? I presuppose that both gold and silver are money, although both have been politically demonetised. That demonetisation, and the devaluation it causes, has encouraged lower order uses of both metals, in jewellery, for instance. However, periodically the metals' monetary character reasserts itself, and the old monetary ratio reappears.


I have seen wildly differing estimates of the physical occurrence of gold and silver in the earth's crust. What difference does it make? It's a fair guess that one factor determining the gold/silver value ratio is the physical ratio in the earth's crust. Over the years I have found that ratio of given as low as 10:1 and as high as 40:1, but usually at 12:1. I asked a mining engineer, and he turned up definitive data.3

According to AGI Data Sheet 57.1, "Abundance of Elements," on average silver occurs at 0.07 parts per million, and gold at 0.004 parts per million in the earth's crust. Thus the naturally occurring ratio is 17.5:1.

Interesting - that's not far from the last monetary ratio - 16:1 -- set when both gold and silver were still universal money in the last century. Nor can I forget that when the great Bunker Hunt was investing in silver back in the 1970s he was often heard to say he expected the ratio to fall to 5:1. Never forget, either, that year by year industry consumessilver, while most of the gold ever mined still sits in a vault (or hangs around a neck) someplace. For 100 years and more that industrial consumption has put steady downward pressure on the ratio.


Now consider the ratio's behaviour before it first broke through its ancient boundary at 16:1.

If you had a chart 45 feet long where every foot represented one century of history, the ratio of gold to silver would never rise above 16 to one until the last fifteen inches. It ranged from a low of 2.5 to 1 to a high of 16:1, and never rose above 12:1 until after 1500. (The ratio's jump above 13:1 after 1500 stemmed from massive silver supplies from the Spanish mines in the Western Hemisphere. The backbone of North and South America, the Cordilleran mountain range, holds the world's richest silver deposits.) For most of human history, a band from 8:1 to 12:1 has contained the ratio.

What drove silver above 16 to 1? It was politically demonetised beginning in 1873 and ending in the late 1930s when Roosevelt's silver manipulations forced China off the silver standard. Removing all that monetary demand for silver naturally made it lose value against gold, and rising industrial demand could not yet soak up the excess supply. From 1873 until 1941 the ratio rose until it hit 100:1 for the first time in history. With numerous zigs and zags, the ratio hit a low in 1980 below 16:1.

I know. I saw it. (On a yearly average basis, the post-1941 lows were 16.97 in 1967 and 14.07 in 1979.)


From that January 1980 low the ratio climbed back to 100 to 1 in February, 1991. It continued on a steady downward path until January, 1998 when it touched under 40:1. From there it has risen to 76.4 to one, and right now the ratio appears to be peaking, ready to roll over and turn down. It seems that the long term trend from 1991 is down, and the upmove from 1998 has been only a correction of that primary downward trend, which should resume when the present correction ends.



Understanding the gold/silver ratio makes possible very profitable arbitrage refinements to our investment strategy.

  • First, we time our purchases by the ratio. When the ratio is relatively high, we favour silver in new purchases. When the ratio is relatively low, we favour gold.
  • Second, we buy that form of silver that offers a possibility of extra profit. When the silver market gets hot, new investors will be buying US 90% silver coin. That drives up the premium to 30 or 40% above the silver value. At that point we can swap 90% coin for one ounce rounds or 100 ounce bars, and convert that premium to extra ounces of silver.
  • Third, we play the ratio. When the ratio is high, we swap gold for silver. Then when the ratio drops, we swap silver back into gold. From the present 76:1, I am looking to make our next swap from silver to gold below 40:1. Every time we cycle through a complete swap - gold to silver and back to gold - we increase our ounces.

These ratio refinements certainly beat the alternative strategy: sitting still with a sterile investment, waiting for the price to rise.


Our strategy is to buy silver with gold when silver is cheap, and then reverse the trade, buying gold with silver, when gold becomes cheap in terms of silver. We swap, for example ten ounces of gold for silver when one gold ounce buys 80 silver ounces (the ratio is 80:1). Then when the ratio drops to 40 to one (40 ounces of silver buys one ounce of gold), we swap back our 80 silver ounces for 20 ounces of gold, doubling our holdings.


  1. Tax consequences. If you have a profit in any gold that you sell and you file income tax returns, you will have to claim the gain on the gold because gold for silver does not qualify as a "like kind" exchange."
  2. Storage. It takes 80 times as much room to store your silver.
  3. Market risk. I could be wrong. The ratio could go higher still, even back to 100, and you would just have to wait that much longer.
  4. Transaction costs. Transaction costs (shipping, spreads, and commission) can be as high as 10%, although they should be somewhat lower. You have to hold the trade long enough to justify the transaction costs, and the transaction costs of trading physical gold and silver is higher than trading some sort of paper like futures or options. (To keep your costs low, I only charge commission on one side of the trade. If your dealer won't do that, find one who will.)


  1. Growth. It takes an investment that pays no dividends and no interest (gold) and makes it grow by increasing the number of ounces you hold.
  2. Potential outperformance. In the last great precious metals bull market, 1960 - 1980, silver outperformed gold about 2.3 times (230%). Gold rose from $35 to $850 or 2,429%. Silver rose from 90 cents to $50, or 5,555%, 2.29 times as fast. Silver is a smaller and therefore much more volatile market, and repeated this outperformance several times between 1941 and 1980. The 200 year mean for the ratio is 31.3:1, so if the ratio just reverts to its historic mean without overshooting it (as in 1980), it will outperform gold over two times.
  3. Precious metals. You never step out of your position in precious metals. You are invested in gold or silver at all times.

    Never skew your portfolio more than 70% to silver. That is, at current market value you should never have more than 70% of your total investment in silver. Keep the other 30% in gold. Always take delivery of your physical metal. Never leave silver in storage with any dealer.


Fair warning: I am not a prophet. If I am wrong about gold/silver ratio, it will cost you money. You'll buy silver instead of gold and the gold will outpace the silver.

For all the reasons listed above, however, I don't think that will happen. I think the best way to profit in the next years will be to slant your precious metals portfolio toward silver, using a ratio trading strategy to increase your gains.

I could be wrong - but I've got 4,500 years of history on my side.

-- F. Sanders, March 5, 2003

© The Moneychanger, 2003

For over 20 years Franklin Sanders has dealt in physical gold and silver and edited a monthly newsletter, The Moneychanger. In 1993 he wrote the book Silver Bonanza. Visit his website and download a free Gold, Silver, & Platinum Portfolio Calculator. It calculates acquisition cost, current market value, average unit value, and average cost per ounce for gold, silver, and platinum. With the portfolio calculator you will also receive free daily updates and market commentary for precious metals spot prices and bullion coin and bar prices.

1 For the umpteenth time, digital photography will not replace silver in photography in any time material to our investment. That's a red herring for the ignorant. A $500 digital camera, or a $100 digital camera for that matter, offers very little competition to a $7.00 recyclable camera that makes prints a couple ofjillion times as detailed.
2 In 2002, silver output by source came 34% from lead/zinc mines, 23% from copper mines, 16% from gold mines, 1% from other mines, and only 25% from primary silver mines. World Silver Survey 2002, Washington: The Silver Institute, 2002; page 26.
3 The American Geological Institute Data Sheets for Geology in the Field, Laboratory, & Office, Third Edition, compiled by J.T. Dutro, Jr., R.V. Dietrich, and R.M. Foose, Data Sheet 57.1, "Abundance of Elements."

Gold is the world’s oldest and most known currency.