Silver has almost never been this cheap – but should you buy?

A friend sent me a screenshot from his phone earlier in the week. It showed the gold price at $1,666/oz and silver at $16.66/oz. In other words an ounce of gold is 100 times the price of an ounce of silver. Or, to use the correct terminology, the gold-silver ratio has gone above 100 – which is almost unheard of.

According to my data, the gold-silver ratio has only ever gone above 100 once before. It didn't happen in the financial crisis of 2008, the dotcom crash of 2000, or the Long Term Capital Management Fund Crisis of 1998. It happened in 1991. Silver was $3.50/oz at the time and gold was, of course, $350. (Actually, it was closer to $370 and the ratio touched 105).

Apart from 1991 the ratio has never been as high as it was on Monday. Not once in history. It’s one of the extraordinary extremes that the coronavirus panic has caused.

The obvious trade here is to sell gold and buy silver. But on the basis of ratios alone, you should also be selling gold and buying oil, base metals, stocks, just about anything. To be clear, now is not the time to be selling gold, particularly with all the fiscal stimulus that’s coming.

A gold-silver ratio of 15 is but a distant memory

The gold-silver ratio is an odd one. Really, it should be somewhere around 15. Silver is only 15 times as abundant as gold – there is about 15 times more silver in the earth’s crust as there is gold.

And, historically, the relative price of the two ranged between around 15 and 20. Until 1875 the USA was a bi-metallic standard – both silver and gold were money, in other words – and the exchange rate between the two metals was 15, more or less.

However, in the 20th century, as we all know, countries abandoned their ties to gold and silver and so money and metal went their separate ways. That ratio of 15 has become an ever-more distant memory.

It did hit 15 briefly in 1981 as the Hunt Brothers tried to corner the silver market. But this was an extraordinary situation. It wasn’t typical. The typical broader trend is that silver is losing its value relative to gold.

One day we will get back to 15, say the most diehard silver bugs. This was something I was convinced of in the ardent silver-fanatic days of my investment youth. I’m not so convinced today.

In fact, you could go one stage further. The gold-silver ratio should be lower than 15. Silver gets used, gold does not – all the gold that has ever been mined, pretty much, still exists somewhere. But silver, with its numerous industrial applications, gets consumed. The ratio between the two should be closer to ten. And yet here we are with that ratio ten times higher – and silver ten times too cheap.

The sad fact for silver bugs is that since silver no longer has any official monetary use, its relative value has plummeted. Some blame shenanigans on futures exchanges for the low price of silver – I blame the evolution of money.

Is the world going to go back to some sort of metallic standard as a result of coronavirus? I doubt it. Money is getting more and more digital; metal is too physical. But I can see one scenario where it might.

Get ready for epic debasement

The authorities’ reaction to the crisis will be to debase currency: slashing rates (we got a dose of that from the Bank of England just this morning), bailouts, money printing (which will be given some new name that is even more obfuscatory than quantitative easing), infrastructure spending (I gather the chancellor is to announce plenty of that in his Budget later today).

Gold bugs have long been waiting for that loss-of-faith moment when faith in fiat money will be lost. Might all the monetary manipulation that is already in place be the long-awaited trigger? The ensuing loss of faith sees us going back to metal.

It’s a possibility, I suppose, but I think I’m too long in the tooth to see that really happening.

I own some silver. I love silver. I don’t think it’s a bad thing to be holding in this time of crisis. If it wasn’t so “precious” it would have been dragged down a lot more – like energy and base metals. It’s certainly cheap. But so are a lot of other things at the moment.

The gold-silver ratio hit a low at 30 in 2011 when silver touched $50. It has been in an uptrend ever since. Plenty of us – me included – have tried to call the top in the ratio and it has kept grinding higher.

The likelihood is that it will pull back a little from the extremes, perhaps even as far as the 80s. But the reality of our modern fiat age is that, as far as the gold-silver ratio is concerned, it will take a fairly extreme change in circumstances for us even to get back to 50. 50 is the new 15.

Sell gold and buy silver as a trade, by all means, but make sure you reverse the trade – or at least start moving up the stops if we ever get back to the 80s, 70s or 60s.

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