The Historic Correlation of Gold and Silver

Gold and silver always shared being an effective hedge against money (either fiat money or gold/silver-backed money), but it’s their differences that present unique price appreciation potentials. If you study the history of gold, you always find silver. Both metals mainly occur together in ores, both are the first mentioned metals in the bible, and both are used in sacred rituals. Since thousands of years, gold and silver are considered precious and valuable. More than 6,000 years ago, Egyptians determined a gold/silver-ratio of 13.3 – and indeed, the ratio traded at an average of 15 in the millenniums thereafter. The Egyptians were the best (proven) analysts ever!? 

However, their 13.3 ratio figure was not based on technical or fundamental data as we use, but the fact that the moon moves 13.3 times faster in the zodiac than the sun. Many of the beliefs in India, whose people are notoriously known to traditionally hoard and hang themselves in gold, pray to the sun, whereas the moon enjoys a high relevancy in Muslim beliefs.

According to Greek historians, King Croesus of Lydia was the first ruler (560-546 BC) issuing a bi-metallic gold/silver currency. There were 2 silver coins: one with 10.72 gram silver and the other half that much resp. 5.36 gram – if you multiply the first one with 10 and the other one with 20, you get 107.2 gram. The known gold/silver-ratio was kept at 13.3; 107.2 gram / 13.3 = 8.04 gram for the one and only gold coin. Thus, 10 big (10.72 gram) silver coins equal 1 gold coin of 8.04 gram and 20 small (5.36 gram) silver coins equal 1 gold coin of 8.04 gram.

Taking a look at the (above) gold/silver ratio since 1800, it strikes the eye that in the beginning it was seemingly constant at around 15, whereas it rose around 3-fold and fluctuates heavily around 45 points since the end of the 1800s. Despite rising as high as 100 in the 1930s and 1990s, the 15-level held as strong support during times of strong corrections in the 1910s, 1960s and 1980s. Currently, it trades at 52 points and thus right in between the resistive (red) triangle leg at approx. 93 and the supportive (green) leg at approx. 33.

Since the 1990s, the ratio traded near the red leg between 50 and 90, whereas recently it fell strongly to the green leg at 33 points. After this short but successful “pullback” to the green leg (now confirmed as new support), the ratio rebounded strongly to the current level. Let’s assume a gold price of $2,000 for the next years: at a gold/silver ratio of 100 silver would trade at $20, at a ratio of 50 silver costs $40, at a ratio of 30 it stands at $66, and at 15 points silver sells for $133. If gold rises to $5,000, silver costs $50 at a ratio of 100, stands at $100 if ratio remains at 50, whereas silver trades at $166 at 30 points, and $333 at 15 points.

Taking the silver price since late 2009 into perspective (below), it strikes the eye that the “strong“ and “long“ price appreciation from $15 to $50 (3.3-fold) between February 2010 and April 2011 occurred after sideways consolidations along red trend lines – and that another such (red) consolidation period formed thereafter (yet with the difference of being much larger and enduring much longer leading to the conclusion that the price appreciation is set to be much stronger and much longer this time; if the red resistance currently at $35 is broken successfully).