Gold-Silver Ratio: Historical and Natural Ratio between Gold and Silver

Determining the fair gold-silver ratio

The gold-silver ratio (GSR) is an important, yet relatively easy to calculate mathematical parameter (Excursus 14).

In pre-Christian times, silver was at times attributed a higher value than gold.[1] This was partly due to the fact that the antiseptic effects of silver were already known. The ancient Egyptians first attempted to relate the value of gold and silver to each other and determined a ratio of 3.[2] In the times of the Lydian king Croesus (6th century BC), who introduced gold and silver coins as a means of payment, and of Alexander the Great, the gold-silver ratio was 10. It remained at this value until shortly after the birth of Christ. After that, it increased and reached a value of 15 in the 5th century A.D. It remained at this level until the end of the 19th century. After the demonetization of silver (1873), the gold-silver ratio doubled by the beginning of the 20th century and now stood at a value of 30. Between 1900 and 2012, the result then fluctuated between 15 and 100.

Gold-silver ratio since 1900

Source:  According to the U.S. Geological Survey; see U.S. Geological Survey (2010), Gold Statistics (Internet retrieved 01 Oct. 2012); U.S. Geological Survey (2010), Silver Statistics (Internet retrieved 01 Oct. 2012).

High: 100.6 (1939 - 1941)

Low: 14.0 (01/1980)

In the early 1930s, the silver market was characterized by low demand and high inventories in the wake of the Great Depression, which caused a rising gold-silver ratio. After World War II, rising industrial consumption led to supply deficits in silver, causing the ratio to decline again. Rising silver prices in the 1970s increased silver supply faster than demand, causing the ratio to rise from 15 to 100 in the 1980s. In addition, the Hunt speculation added considerably to the price of silver. Nelson Bunker Hunt was one of the richest men in the world at the time. With wealthy businessmen from Saudi Arabia, he bought large quantities of silver. As a result, he tightened the supply of silver, causing the price of silver to skyrocket. The fluctuating trend since the early 1990s indicates a downward trend. In April 2011, the gold-silver ratio then briefly fell to a value of just over 30 (but then initially rose again to over 50 after a correction in the silver price). This meant that the price ratio had in the meantime fallen to half of the previous year's level and was thus only twice as high as it had been for around one and a half millennia until the demonetization of silver at the end of the 19th century, as it was before the world economic crisis in the 1920s or as it was at the beginning of 1980.

The overall view of the following ten criteria will show that the fair level of the gold-silver ratio is still well below these lows, at about the level in the time of ancient Egypt.

Criterion 1: Precious metal ratios in the earth's crust

In the period when gold and silver still had a monetary significance (as means of payment or as deposit standard of paper currencies), the gold-silver ratio corresponded with a value of 15 and a half millennia to the inverse ratio of the deposits in the earth's crust. As a result of the demonetization of silver, the ratio temporarily rose to 100 in the 20th century. Only at two low points did the ratio between the price of gold and silver fall again briefly to 15.

Conclusion: Silver is 15 times more abundant in the earth's crust than gold; this corresponds to the height of the gold-silver ratio observed from the 5th to the 19th century and its lows in the 20th century

Criterion 2: Production to date

To date, 0.17 million tons of gold and 1.7 million tons of silver have been mined (ratio of 1 to 10). In the Middle Ages, the ratio was still 1 to 80, from the 15th to 18th centuries it was 1 to 40, and in the 19th century it was 1 to 13; in the 20th/21st century it dropped to 1 to 8.

Conclusion: The increase in gold production was greater than that in silver production, resulting in a continuous decrease in the production-quantity ratio (Middle Ages: 1 to 80; 21st century: 1 to 8)

Criterion 3: Remaining underground resources

Of the precious metal discoveries to date - mined quantities and underground resources - of 0.27 million tons of gold, three-fifths have already been mined, and of the 2.25 million tons of silver, three-quarters have been mined. The resources amount to 0.1 and 0.57 mill. tons, respectively.

Conclusion: The ratio of measured or indicated underground resources of gold and silver is just under 1 to 6

Criterion 4: Range of Potentially Mineable Resources

The statistical range of the resources of gold is still just under 36 years of the global mine production of 2011, that of silver even only 24 years. Gold resources would be depleted in 2056 if mine production increased by 2% per year and the resource base doubled; silver resources would be depleted in 2045.

Conclusion: The range of gold exceeds that of silver by half

Criterion 5: Aboveground stocks

Nine-tenths of the amount of gold ever mined is still available (0.15 mill. tons), but of the silver mined, only two-fifths (0.7 thousand tons) due to high industrial consumption.

Conclusion: The ratio of above-ground world gold and silver stocks is thus 1 to 4.5

Criterion 6: Market valuation of stocks and resources

The gold price averaged 1,750 in October 2012, and the silver price averaged US$33.5 per troy ounce (GSR: 52). The value of aboveground gold stocks was thus just under US$8,500 billion, while the value of silver stocks, which were 4.5 times higher in physical units, was only US$675 billion. For the valuation of the underground gold resources - measured by the market capitalization of the mines - about US$400 per troy ounce of gold can be estimated, for silver at best US$5 per troy ounce of silver. This results in a value of gold resources of just under US$1,300 billion and silver resources of US$100 billion.

Conclusion: Stocks and resources of gold and silver correspond to a ratio of 1 to 5, gold nevertheless registers a market value 13 times higher than silver

Criterion 7: Demand structure

Gold demand in 2011 was 4.5, silver demand was 34 thousand tons. Thus, above-ground gold inventories represent 33 years of gold demand, while silver inventories represent only 21 years of silver demand. In addition, silver is irretrievably consumed to a considerable extent as a result of high industrial demand, while gold, which is comparatively insignificant in industrial terms, is primarily used for hoarding. The ratio of above-ground gold and silver stocks will thus continue to decline.

Conclusion The ratio of physical demand for gold to that for silver is 1 to 7 (2011), and the range of aboveground holdings of gold exceeds that of silver by nearly six-tenths

Criterion 8: Perception of precious metals as a commodity

After the demonetization of precious metals - abolition of the bimetallic standard in 1873 and the gold standard in 1971 - they were perceived primarily as raw materials for industry or jewelry making. As far as industrial use is concerned, this is especially true for silver, since industry accounts for about half of the demand for silver, compared to only one-tenth of the demand for gold.

Conclusion: The ratio of industrial demand for gold and silver, calculated in physical units (ounces), is 1 to 33 (2011)

Criterion 9: Level of extraction costs

The consequence of the primary perception of precious metals as a commodity was that the level of extraction costs was decisive for the precious metal price relation. The variable extraction costs(cash costs) of gold are significantly higher because it occurs in the earth's crust in lower concentrations and generally deeper layers of the earth than silver. The average cash cost of extracting a troy ounce of gold in 2010 was US$560, and for a troy ounce of silver at the 30 largest primary silver mines it was just over US$5.[3] At a gold price of US$1,750 (October 2012), the variable extraction costs represent 32% of the value of a troy ounce of gold; at a silver price of US$33.5, their share is not even half as high (15%).

Conclusion: The variable costs of gold mining are more than 100 times higher per ounce than those of silver mining, but the share of the value of an ounce is twice as high for gold as for silver

Criterion 10: Monetary function

Although the precious metals have been completely demonetized, some monetary functions continue to exist: central banks hold a good fifth of the world's gold as currency reserves. The markets therefore price a monetary premium into the price of gold.[4] This is one of the reasons for the rise in the gold-silver ratio in the 20th century. However, rising precious metal prices and high precious metal investments (ETFs, coins) are indications of a growing distrust of the unbacked paper money system and the returning perception of precious metals as an instrument to hedge against inflation-related asset losses. Silver is thus also increasingly regaining a de facto monetary function.

Conclusion: The ratio of investment and coin demand between gold and silver in physical units was 1 to 5.4 in 2011