It’s time to buy silver (and sell gold)

Silver coins © Getty
Silver has been a constant disappointment to investors

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For those of you with busy schedules who like to see arguments made in 280 characters or less, let me come straight to the point: the time has come to sell your gold and buy silver.

Got that?

Right. Now, those of you who are interested to know why I would make such an assertion, read on.

In an ideal world, gold would cost 15 times as much as silver

The gold-silver ratio measures how many ounces of silver it takes to buy an ounce of gold. If the ratio is at, say, 75, then gold is 75 times the price of silver and it would take 75 ounces of silver to buy an ounce of gold.

Geologists seem to agree that there is somewhere around 15 times more silver in the Earth’s crust than gold. Gold is therefore 15 times rarer.

In theory, therefore, the gold-silver ratio should stand at 15 – gold should be 15 times the price of silver. And until the 20th century, that was mostly the case. Indeed, there are many examples of nations which operated under a bi-metallic standard – the USA until 1875 being perhaps the most famous – where the exchange rate between the two metals was 15, more or less.

However, in the 20th century, as money and metal went their separate ways, that ratio of 15 has become an ever-more distant memory. One day it will get there again, the most ardent of silver bugs will tell you.

And on one day in 1980, it did – on 18 January 1980, silver went to $50 as the infamous Hunt Brothers attempted to corner the market.

But since then the closest it has been was 30, in April 2011, when silver touched $50.

Here, courtesy of our man in Australia, gold and silver data hound Nick Laird of, is the gold-silver ratio since 1720.

Gold-silver ratio since 1720

You can see how the ratio was constant around 15 until the late 1800s, after which it became a volatile beast, climbing as high as 100 (in World War II) before coming back down to earth at 15, then repeating.

Even today, with gold at $1,320, at a ratio of 15, silver should be $88. It isn’t. It is $16.

Given silver’s historical relationship with money and the flaws in the fiat money system, many – including your author at one stage, until he grew cynical – thought that silver would “do a bitcoin”. But it didn’t.

Then there are all the industrial uses, particularly in electrics. Many thought silver would “do a lithium”, or a cobalt, or a uranium.

It didn’t. It flirted with such notions in 2011, but $50 proved the cap.

Silver is like a friend’s errant younger sibling – oodles of potential, but never quite delivering on its promise, beyond the occasional glimpse of greatness.

The bottom line is this: for all the beauty of silver, and for all its potential as an investment, an industrial metal and a precious metal, the reality is that since it lost its monetary role, it has never delivered on its potential for more than a few days in market extremis. When it was official money, that backing meant its value held; without it, the value does not seem to sustain.

Silver might be a constant disappointment – but it’s time to buy

But now, having properly put the boot in, I am going to tell you to buy silver. Not only that, I am going to suggest that you should even sell gold – which has been a much more reliable store of wealth – to buy it. My reasoning is simple: the gold-silver ratio has gone above 80.

This chart shows the gold-silver ratio since 1980. You can see that, on every occasion since around 1994 that the ratio has gone to 80, or just above (where I have drawn the dotted red line), the ratio has soon fallen.

Gold-silver ratio since 1980

It happened in 2016, in 2009, in 2003, in 1997 and in 1995.

The risk is that it carries on going up to the 100 area, just as it did in 1991. Given that the ratio has only done this twice in all recorded history – once in 1991 and once in 1941, during a world war – I suggest that the probability of this happening is low. And, if it does go that high, it will come back again within a year or three.

The likelihood is that the ratio will come towards the lower end of the “normal range” in the high 40s or lows 50s, at which point you switch out of silver and back into gold. But then the gold you sold for 80 ounces of silver, you are now buying back for around 50 ounces, so you’re ending up with a lot more of it.

The blue sky – or BS – argument is that silver goes back to 30, or even its historically and geologically-normal ratio of 15. One day it will. But don’t hold your breath.

More reasons to be bullish on silver

In the meantime, there is another development that adds some fuel to the bullish silver fire. That is the latest positions of the traders on the Chicago futures exchanges.

These traders are bracketed into three groups – the large speculators, the small speculators and the commercials. The commercials and, to a lesser extent the small speculators, are considered the smart money, while the large specs are considered the least wise of the three.

Nothing is so simple, of course. Nevertheless, the large specs (the uninformed money) are now net short for the first time since 2003. Back then silver was $5.

What’s more, every time since then that the large speculators’ net position has moved close to the zero line, that has proved to be a buying point for silver. All in all this is a very bullish development, given that the silver price is largely set in the futures markets.

It’s worth noting that the equivalent position for gold is not nearly so bullish. To be uber excited, you would want to see them both in alignment. Shucks. You can’t have everything.

There are all sorts of ways to buy silver. You can buy bullion from a dealer such as Sharps Pixley (although this can be VAT-able); you can buy an ETF from your broker; you can go to one of the online dealers who store it for you (Goldcore, Goldmoney, BullionVault); you can use a leveraged product; or you can buy one the silver mining companies.

I’ll re-visit this ratio in six months or so to see how it’s panning out.

  • This has been said many times, including by me 3 years ago.

    I have no doubt that one day that ratio of 15 will be hit. But probably not in my lifetime. And even if it is hit, it will be gold’s price coming down rather than silver rising. Why do I say that? Because gold isn’t the only refuge from fiat currency these days. It’s high price is no more justifiable than bitcoin’s.

    A long-short is the way to go, for the thick skinned!

    • ….and the increasing speculation in bitcoin and cryptos in general will end up impacting on gold and silver prices in the future. These speculative investors will be sorely missed by the metals

  • Michael

    The silver price will go higher, much higher.
    But, don’t pin your hopes on industrial uses. If the silver price is too high for manufacturers to use they will find alternatives. One of the reasons they use silver now is because of the price. Of course they use it because it does the job best, but charge 10 times as much and alternatives will be sought.
    Most people however will miss the boat with the silver price. It will rocket over night when the giant short positions are changed. The big boys with their paper contracts will all jump ship at the same time making it hard for us mortals to join the party.
    Better to buy now – and buy physical silver.

  • Enrico Fermi

    Agree the COT structure couldn’t be more bullish right now but we will have to see about that ratio. Modern technology has sent the extraction cost for the best silver primaries to 13$ish while it remains 800-1k for gold so the 15 number really is a thing of the past. The strongest argument in favour of silver must be the depletion of mines that has occured in the past few years due to low price and the fact we now have yearly silver deficits, check the silver institute for more

  • Rob Myers

    I am not sure in the logic of buying something that has been “a constant disappointment”. Ever since the silver content was removed from currency, the value ratio of silver to gold has extended. Silver is a relatively common mineral which is used in a few manufacturing processes. It tarnishes and oxidises so gold is the preferred mineral of choice in Asia. Who wants to clean silver? I popped into the London silver vaults a couple of years ago on an errand. There were a lot of long faces and traders reading newspapers. I think that says everything about silver.

  • dlp6666

    Why not hedge your bets and buy CEF.U (Sprott Physical Gold & Silver Trust)?

  • 80110x

    A quick look at the current silver chart shows it already dropped 20% since september….

  • disqus_jppf4BmAXO

    Gold has superior physical properties than silver. I don’t see how the 15 ratio makes sense. Rarity is not the only factor.

    • Jay Hatcher

      Silver trumps gold as most conductive of heat and electricity, most reflective and antibacterial.

  • Mark Antrobus

    The phrases ‘spread your risk’ and ‘balanced portfolio’ come to mind.

  • GMAC

    There is a lot going on here and it is all to do with precious metal price volatility and margins. Silver is a more marginal product and hence has greater price volatility… hence the changing ratios. Own silver if you think the precious metals price is going to rise, own gold if you think the precious metals price is going to fall. Another way of looking at it is own silver projecting a weak dollar or dollar inflation and vice versa.

    Incidentally, if you bought an ounce of gold for $400 in 1980 (the first time it went above that price… but how many people did that with foresight) and then diligently turned it into 80 ounces of silver every time the ratio went above 80 and back into twice as many ounces of gold every time the ratio dipped below 40, you would end up with 640 ounces of silver, currently worth $10,560. This represents a total return of about 2,540% or roughly 9% per annum.

    On the other hand, if you bought the S&P 500 for 100 points in 1980 and sold at its peak of 2800 today, that is another 2800% gain or again roughly 9% per annum.

    So really, for a roughly 7% ‘real’ rate of return over a 40 year investing time period you do not even have to worry about all this investment milarky, simply save ½ your money in precious metals switching between gold and silver and the other ½ in an index tracker.

    The other benefit of this is that my cyclical studies of consumption versus investment show that in real terms when asset prices peak, commodity prices bottom and vice versa… so the instantaneous loss or gain on your precious metal holding will be automatically offset by your equity holdings.

    Pleas be assured… this is not investment advice, merely a strategy that I tend to follow… at the moment … witness

    1929 Equity Peak Gold Fixed
    1946 Equity Low Gold Fixed
    1965 Equity Peak Gold Fixed
    1981 Equity Low Gold Peak
    2000 Equity Peak Gold Low
    2018/19 Equity Low? Gold Peak??

  • James Clander

    What a load of old rubbish & what a crime to see it published.
    If anything do the OPPOSITE to what this Clown advises.

    • Robert Happek

      The high gold/silver price ratio is a reflection of the fact that most of the silver is mined as a byproduct of industrial base metals like copper, zinc, nickel and other. In orther words, the mining of base metals produces for free a certain amount of silver. This leads to an artificially low silver price and hence the unusually high gold/silver ratio, The demand for industrial metals was much lower in the 19th century, hence the relatively high price of silver in the 19th century.

      It is a logical fallacy to conclude that the ratio of silver to gold in the crust of the earth (15) must be also reflected in the price ratio of these metals. That is indeed nonsense because most of the gold and silver deposits can not be mined economically. Only deposits wtih a high enough concentration of silver or gold can be mined. So at best, the ratio of economically minable silver to economically minable gold should be considered. One striking example is platimum. Although the geological density of platinum is roughly the same as of gold, the fact is that the only significant deposits of economically mineable platinum can be found in South Africa and Russia, while in the case of gold, economically mineable deposits can be found almost everywhere in the world.

      Finally, the main argument against silver is that is too bulky for investment purposes. $50,000 in gold fits conveniently a pocket in my trousers. The same amount in silver is so bulky and so heavy that it can not be lifted by a normal person. Storing $1 million in gold is very easy, storing the same amount in silver it is a nightmare.

  • bebe rebozo

    The two year chart of silver looks a lot like a two year chart of GDX and GDXJ. If silver is ready to move it will be breaking out of a year long plus sideways pattern that could force gold over resistance at 1380. The etf SIL might also be worth your attention.

  • Bab Boon

    On the very rare occasions I have been to watch Greyhound racing I have prefered the southern tracks to the northern.
    On southern tracks you get 6 dogs racing and on the northern 5.
    That means you can have an eachway bet on the southern dog tracks.

    It makes a surprisingly good economical model.

    Rather than buy gold or silver I buy equities in the mining companies, and for the most part buy folk like Coeur Mining who cover both gold & silver.

    Because the miners act like a muItiplier a 1% rise in the metal typically causes about a 5% up lift in the share price (unfortunately a 1% fall seems to cause a 6% drop, but still).

    The point is, that way you have both bases covered.
    And the price of quite a lot of the miners remain down at present.

    I’d advise against putting your profits on the Greyhounds ‘tho.