How Undervalued Is Silver Relative To Gold?

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The gold/silver ratio is now hovering around 52.60 now.  It has come down from its recent high around 60.  Silver is now doing much better than gold, as shown by the falling ratio.  I wouldn’t be at all surprised to see the ratio drop into the 40s if JP Morgan stays on the sidelines.  It should happen in the near future.

How undervalued is silver?  For comparison’s sake, less than $6 billion is invested in silver compared to approximately $2,500 billion in bonds.  A mere “drop in the bucket” of investable funds resided in silver – 0.0024% to be exact.

There is currently only about three ounces of above-ground silver to one ounce of above-ground gold.  Just prior to WW2 the number was about five ounces of silver for each one ounce of gold.  The gold/silver price ratio then was around 60, even though there was far more silver around relative to gold than there is today.  Put another way, the gold/silver ratio is about the same now as it was when there was 167% more silver around, relative to gold.  The ratio, one would think, would be much lower to reflect the drop in world silver inventories.  That’s why I expect to see the ratio fall into the high 30s or low 40s minimum.

Is gold overpriced now?  Absolutely not.  Check out the following graphs, courtesy of Valcambi Gold.

In order to calculate ‘real’ highs for gold one has to adjust for inflation. When using government inflation statistics then we’ll see that the 1980 peak of $850 equals $2500+ today. Since no secular bull market ever ended without making new ‘real’ highs gold’s current bull still has a long way to go. ‘Real’ highs gold’s current bull still has a long way to go.

In order to calculate ‘real’ highs for gold one has to adjust for inflation. When using ShadowStats inflation statistics we’ll see that the 1980 peak of $850 equals $9000+ today. The inflation statics published by John Williams at www.shadowstats.com present a more realistic picture of true US inflation numbers. As this chart clearly demonstrates gold is far away from making new ‘real’ highs. + Today. Since no secular bull market ever ended without making new ‘real’ highs gold’s current bull still has a long way to go.

This chart clearly demonstrates that our current monetary system is broken. In times of economic stress/uncertainties government tends to inject enough liquidity into the system to keep things going. Then when things turn back to normal government drains the injected liquidity from the system. A good example concerns the Y2K crisis and the 9-11 event. The banking crisis of 2008 however dwarfed all previous events, the base money supply tripled almost over night, yet, many people still don’t understand why gold prices have tripled since 2008.

Gold started its current bull run in April 2001 after hitting a 21 year low at $256. Gold has been without doubt the investment choice of the decade closing the decade at an all time high of $1425 resulting in an astonishing gain of more than 550% and thus outperforming the DOW, NASDAQ and S&P 500 by great margin. Despite its stellar rise gold still hasn’t caught interest of most retail investors, a clear indication this bull market still has a long way to go.

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