The Gold:Silver Price Ratio
An article this morning says 'Am I being too conservative with my silver price target?' - reading time 3 minutes. In the article, the author states his current physical silver price target to be U.S.$300 per ounce, which he bases on his long-term physical gold price target of U.S.$5,000 per ounce, and what he (and many other authors) refer to as the historic gold/silver price ratio of 16 (divide 5,000 by 16, and you get 312.5). As someone who owns some physical silver, I certainly would like to simply sit back today and watch the first round of the Masters Golf Tournament, secure in the knowledge that based on this article my economic future and that of my family is secure. That said, while I plan to watch snippets of the Masters today, I will be spending most of it in front of my computer.
first, the author doesn't say in his article how he has determined his long-term physical gold price target of U.S.$5,000, nor does he say what he means by long-term. In any event as you know, while I don't discount carefully considered and documented short-term (3 months to one year) gold price trends, let alone gold price targets beyond one year. Accordingly, even if I knew how the author reached his long-term target price I wouldn't place any weight on it. Also, I have no idea how anyone can predict anything in this economic and world environment beyond, at best, the end of this calendar year. Even then, I think any prediction for 2011 for the gold, or any other commodity, price needs to be qualified for 'the effects of completely unexpected events'. For example, who would have thought even 90 days ago that Egypt would experience a major societal disruption;
second, as noted above lots of silver commentators talk about a gold/silver price ratio of 1:16, and place various degrees of reliance on that ratio as they formulate their views. At least that is how I read a lot of what is said about the silver price. If you look at an historic gold:silver price chart dating going back to 1975 you will see the gold:silver price ratio touched 1:16 only in 1980, was as high as 1:100 in 1991, was at about 1:38 in 1998, and since then until just recently when it returned to this 1:38 level has ranged from about 1:45 to 1:85. Further, according to Wikipedia, the average gold:silver price ratio over the 100 year period ended 1999 was 1:47 - and that in 1792 and 1803 the U.S. and France respectively legislated that ratio at 1:15 and 1/15.5 respectively at a time silver wasn't used industrially to anything like the extent it is today; and,
third, say what you will, from my perspective the world is a very different place in very many ways from what it was even 15 years ago.
As a result of the foregoing I give no weight to predictions based all or in part on what I see today as a meaningless 1:16 ratio. Think hard about this, and then let me know your thoughts - particularly if you disagree with me, by clicking here and commenting on my views.