The argument is based on the belief that there is a fundamental rationale for the ratio and that both metals will gravitate towards it.
In the Mint Act of 1792, the price of gold was set at $20.67 per ounce. and the price of silver at $1.29 per ounce. Official fixed prices for both metals were in effect when the creation of the Federal Reserve was authorized by an act of Congress in 1913.
When gold peaked in August 2020 at $2060 per ounce, it marked a record and almost exact hundredfold increase ($2060 divided by $20.67) in price over the past century. This corresponds to the loss of ninety-nine percent of the purchasing power of the US dollar during the same period.
The price of silver in August 2020 peaked at $29.26 per ounce. which was not a historical record. Also, the multiple increase in the price of silver is less than twenty-three ($29.26 divided by $1.29 = 22.68) times compared to the hundred times increase of gold.
This means that the price of silver does not follow the effects of inflation. It’s not even close to doing it.
For silver to match the hundredfold increase in the price of gold to $2060 per ounce, the price of silver would have to be $129 per ounce. ($129 divided by $1.29 = 100).
New gold-silver relationship?
In March 1931, the price of silver was $0.29 an ounce, having fallen with other commodities during the decade of the 1920s. The price of silver had fallen seventy-five percent from its high of $1.13 an ounce. in June 1919.
The official price of silver was still $1.29 per ounce, so the amount of silver in a silver dollar was worth almost eighty percent less than the official government price.
If we use $0.29 per ounce. (a fully deflated price and only a penny off its all-time low of $0.28 oz) To gauge silver price performance going forward, we see that in August 2020 at $29.26 oz. silver’s increase is now close to a hundred times and matches gold’s hundred times increase.
Calculating a ratio for the two metals yields a result that is significantly different from the official 16:1 number. When we divide the gold price of $20.67 oz. by $0.29 an ounce. for silver, the result is a ratio of 71:1, instead of 16:1.
This compares favorably to the 70:1 ratio resulting from the calculation using August 2020 highs for both metals (2060 oz divided by 29.26 oz).
When comparing the price performance of silver to that of gold, measuring from Depression-era lows for silver is more realistic than using the $1.29 l ‘ounce. fixed price.
Investors and others should reconsider any claims that silver is undervalued relative to gold.
If, however, you find it useful to calculate and rely on a gold/silver ratio, please keep the following in mind:
- The current gold/silver ratio is 78:1; not 16:1
- The ratio of gold prices to silver prices has tended to rise in favor of gold for over forty years
- The gold/silver ratio will continue to widen in favor of gold as long as the US dollar continues to lose purchasing power
Kelsey Williams is the author of two books: WHAT IS INFLATION, WHAT IT IS NOT AND WHO IS RESPONSIBLE FOR IT, and ALL HAIL THE FED!