The chart above shows the gold-silver ratio (GSR) for the last 100-years. The chart looks goofy from 1915 to about 1970 because the US had the price of gold fixed for long periods of time. Then, once gold was allowed to trade freely, the GSR started to look like a normal price chart. Anyway...
As of today, the GSR sits at about 62.3 meaning that gold is 62.3 times the price of silver. On an absolute basis, that doesn't tell us a whole lot. When compared to years past, however, that number takes on quite a bit more meaning. Just eye-balling it (I don't feel like running a regression), the GSR has spent most of the last 30 years between 50 and 80. And for the 30 years prior to that, the GSR spent most of its time between 15 and 45. Going back yet another 30 years, you can see that it was back between 50 and 80. (I'm sensing a pattern here)
The old saying has been repeated ad nauseam, but I'll say it anyway: History may not repeat, but it sure does rhyme. I think you can make a strong argument, for several reasons that I'll lay out below, that the GSR is now entering a prolonged period in the lower half of its historical range.
- As I just said, we spent 25-30 years in the upper range, followed by 25-30 years in the lower range, followed by 25-30 more years in the upper range. Simply assuming that the pattern plays out, we're ready for another dip into the lower range.
- Since about 1990, we have been in a fairly clean downward channel as highlighted by the red arrows. We just bumped our heads on the upper trend line and it sure looks like it's turned lower. Again, following the pattern, it looks like we'll make another attempt at the lower end of the channel.
- Lastly, a GSR of about 15 seems to be the ultra-long-term support as shown in the red circles. After essentially double-topping in 1991 at the extreme reading of 100, the GSR has been gradually falling. I believe it's logical that it will now over-correct to the downside and re-test the 15 level at some point.
So what does this all mean? If I'm right about the GSR dropping into the lower range over the next 20-30 years, then one of two things will happen. Either a) the price of gold drops like a rock, or b) the price of silver starts dramatically outperforming gold. My money is on option b as the price of silver, in my humble opinion, is ready to rock and roll. Of course, the best case for you precious metals bulls is that gold AND silver start shooting higher, with silver simply moving at a faster pace. This would put the absolute value of silver sky-high relative to history. So, if gold moves to $2,500/oz, and the GSR moves to 30 (for argument's sake), then that puts silver at a price of $83/oz. Now let's do one more, just for fun. Let's say that the price of gold reaches it's inflation-adjusted all-time high of $9,000/oz as described here. And let's say the GSR overshoots to the downside and hits 15 like it's done several times before. That would put silver at $600/oz.
I will now leave it up to you to decide if silver is fully valued today at $21/oz.