Gold versus Silver

This is the thirteenth post in a series entitled Currency, Money and the Economy.

In previous posts, we have been examining precious metals. However, the discussion focused around gold. As we move away from the comparison of precious metals to paper assets, let’s examine the relationship between gold and silver.

Throughout history, silver has always followed gold in preference of precious metals. The reason for this is that silver has been more abundant to mine than gold. Therefore, gold always had more value than silver because it was rarer. In ancient times, the value of gold was approximately ten times the value of silver. Is this ratio appropriate today, though?

Estimates through history put the amount of gold mined at 4 billion ounces. For silver, estimate of mined quantities is 40 billion ounces. So a price ratio of ten seems to be realistic. However, that ratio may no longer be appropriate.

The advent of technology in the 20th century has affected the quantities of silver available. Beginning with photographic film, silver began having an importance in various industries. Today, everything from batteries to cell phones to solar panels uses silver. Since these items are discarded after a time, the silver is consumed and no longer recoverable. On the other hand, due the high price of gold, most gold has remained intact in the form of bullion and jewelry.

Estimates of gold remaining in the world is 3.5 billion ounces, or 88% of that mined. Estimates of silver remaining in the world is 14 billion ounces, or only 35% of that mined. The rest has been consumed. In addition, the number of technological devices continues to grow, which means that more and more silver is being consumed.

Similar to the peak oil theory, it is getting harder and harder to find both gold and silver reserves that are economically viable to be mined. In fact, only 25% of the silver mined today comes from pure silver mining operations. The rest comes from byproducts of other mining operations, such as copper, nickel and zinc. The bottom line is that silver is becoming rarer and is being consumed at a much faster rate than at any other time in history.

Therefore, returning to our ratio, a more realistic ratio maybe for 4 instead of 10. However, let’s keep both ratios in our heads and see what impact they have. The current price of gold is $1000 an ounce. The current price of silver is $18 an ounce. Therefore, the current price ratio is 56, way higher than either of the two ratios we have come up with. This means that either gold is either way overpriced or silver is way underpriced. Given the current economic conditions we have discussed in previous posts, the gold price is probably more accurate. Therefore, the price of silver is way lower than it should be from a supply/demand standpoint.

There are two possible explanations for this discrepancy. One is that because it is treated more as an industrial metal like copper, it is priced as such. The problem is that silver is much rarer than copper and nickel. The only industrial metals rarer than silver are platinum and palladium (we will cover those two in a later post). The second reason is that it does not get the publicity it should. For example, when you hear gold break to new levels, no one ever mentions or cares about the price of silver.

However, if history has taught us anything, it tells us that when supply and demand get out of whack, a severe correction is waiting in the wings. What does that mean? That means that one day soon, the world will wake up and realize that silver has been undervalued for too long and the ratio will plummet to levels that match more accurate supply/demand estimates. Let’s see how that can work to our advantage in the next post.