After a brutal free fall of all major asset classes as the Coronavirus reared it’s ugly head mid March, gold rebounded in a big way to prices not seen since before the largest bull run in history really started picking up steam around 7 years ago. While silver did bounce hard from it’s lows of around $12 per ounce, it’s current price is sitting a far cry from the near $20 levels it was trading at just before the Coronavirus carnage.
Gold, so far, is the clear winner among metals as this crisis unfolds. Looming hyperinflation in the face of unprecedented stimulus packages, gold shortages due to mining shutdowns, and everyone from retail investors to nations stockpiling the yellow metal due to the certain uncertainty of post Coronavirus macroeconomic backdrop is leading the gold price on a clear course to $2,000 and beyond. We could be looking at new all time highs in the next few months, if not weeks.
In terms of price, silver traditionally follows gold. It has a history of lagging behind for years and then catching up all at once, leading to eye widening rallies. So far we aren’t seeing this kind of bullish momentum, but history repeats itself and when we talk about silver and gold prices, we have more price data than we do for any other financial instrument, ever.
What is the correct silver to gold ratio?
Upon the death of Alexander the Great, it was 12.5 ounces of silver to every 1 ounce of gold. Historically, however, it’s been more like 15 to 1 and currently we’re trading the metals in a way that suggest gold is more valuable compared to silver than it ever was, in all of history. Scientists have recently confirmed that their is about 19 ounces of silver for every 1 ounce of gold in the earth’s crust. So technically speaking, gold is 19 times rarer than silver, and it’s been traded near that range all throughout history.
Just looking at the technical data, and not considering our current economic backdrop, the silver to gold ratio is due for a significant correction. Whether gold is overpriced or silver is undervalued remains unclear, but if the flight to cash is over and investors are looking for a store of value to protect them from the coming inflation, metals are likely all going to benefit.
What’s next for the prices of silver and gold?
While gold is showing strength currently due to it’s use as a store of value since before history was beginning to get scribbled onto cave walls, it’s more recently found uses in electronics and many other applications. But not only is silver is the best electrical and thermal conductor of all metals it’s finding even more applications in budding industries including solar panels and even antibiotics. If the silver gold ratio were to suddenly correct to around 20 to 1, which would fall in line with historical and even more recent data, it’s likely a sharp upwards correction would be made in the silver price.
A correction in the silver gold ratio that took it back to the historical norms of 20 to 1 would see the current silver price per ounce close to $85, which would be a 566% increase from the current levels.