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Silver’s Price Performance – Better Than You Think

By:
Kelsey Williams
Published: Jan 30, 2022, 07:52 GMT+00:00

Maybe silver’s price performance is not so bad. There is a case to be made that silver has met its expectations; at least relative to gold, that is.

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In this article:

Silver’s Price Performance

Those who are insistent that silver has huge ground to make up in comparison to the gold price should take special note.

Gold-Silver Ratio

Whenever comparisons are made between gold and silver prices, some investors and analysts base expectations for higher silver prices on the fact that a return to the fixed gold to silver ratio of 16:1 is inevitable.

The argument is based on the belief that there is a fundamental justification for the ratio and that the two metals will gravitate back towards it.

In the Mint Act of 1792, the gold price was fixed at $20.67 oz. and the silver price at $1.29 oz. The official fixed prices for both metals were in effect when the creation of Federal Reserve was authorized by an act of Congress in 1913.

When gold peaked in August 2020 at $2060 oz., it marked an all-time high and nearly exact one-hundred fold increase ($2060 divided by $20.67) in price over the past century. This correlates with the ninety-nine percent loss in US dollar purchasing power over the same time period.

The price of silver in August 2020 peaked at $29.26 oz. which was not an all-time high. Also, the multiple increase in silver’s price is less than twenty-three ($29.26 divided by $1.29 = 22.68) fold compared to gold’s one-hundred fold increase.

This means that silver’s price is not keeping up with the effects of inflation. It is not even close to doing so.

In order for silver to match the one-hundred fold price increase in gold at $2060 oz., the price of silver would need to be $129 oz. ($129 divided by $1.29 = 100).

New Gold-Silver Ratio?

In March 1931 the price of silver was $.29 oz., having fallen along with other commodities over the decade of the 1920s. Silver’s price had declined seventy-five percent from its high of $1.13 oz. in June 1919.

The official price of silver was still $1.29 oz., so the amount of silver in a silver dollar was worth nearly eighty percent less than the official government price.

If we use $.29 oz. (a fully deflated price and only one penny off its all-time low of $.28 oz.) to measure silver’s price performance going forward, we find that in August 2020 at $29.26 oz. silver’s increase is now close to one-hundred fold and matches the one-hundred fold increase in gold.

Calculating a ratio for the two metals yields a considerably different result than the official 16:1 number. When we divide the gold price of $20.67 oz. by $.29 oz. for silver, the result is a ratio of 71:1, rather than 16:1.

That compares favorably with the ratio of 70:1 resulting from the calculation using the August 2020 highs for both metals ($2060 oz. divided by $29.26 oz.).

Conclusion

When comparing silver’s price performance to gold’s, measuring from Depression-era lows for silver is more realistic than using the $1.29 oz. fixed price.

Investors and others should reconsider any pronouncements claiming that silver is undervalued relative to gold.

If, however, you think that there is merit in calculating and relying on any gold-to-silver ratio, please keep in mind the following:

  • The current gold-to-silver ratio is 78:1; not 16:1
  • The ratio of gold prices to silver prices has trended higher in favor of gold for more than forty years
  • The gold-to-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: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT, and ALL HAIL THE FED!

About the Author

Kelsey Williamscontributor

Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner.

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