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Kelsey Williams

Kelsey Williams

Gold Analyst  Kelsey's Gold Facts Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial…

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Gold-Silver Ratio: Debunking The Myth

A 16-to-1 gold to silver ratio has been the Holy Grail of some silver investors since the mid-sixties.

Unfortunately, fifty years later, it is a quest that continues unabated without success.

In fact, there is evidence that contradicts and widens the chasm that separates wishful thinking from reality.

In the Mint Act of 1792, the U.S. government arbitrarily chose a 16 to 1 ratio of gold prices to silver prices. The actual prices were set at $20.67 per ounce for gold; and $1.29 per ounce for silver.

Prior to 1792 the U.S. did not strike its own coinage. That changed with the establishment of the Philadelphia Mint, which was also authorized by the Mint Act of 1792.

The official price of silver and the market value of silver remained relatively close until the late 1800s.

In 1859, prospectors discovered the Comstock Lode in Virginia City, Nevada. It was the largest silver vein in the world.

Combined with silver already in circulation, this additional supply “flooded the market” and forced the value of silver well below its official price of $1.29 per ounce. This is another classic, historical example of inflation in a pure sense – a devaluation of the money supply. The silver in a silver dollar was now worth much less than the official price of $1.29 per ounce. (Also see: Mansa Musa, Gold, And Inflation)

Congress responded promptly by passing the Coinage Act of 1873, ceasing all production of silver coinage in the U.S. Five years later it reversed itself by passing the Bland-Allison Act which restored silver as legal tender and required the U.S. Treasury to buy large quantities of it. Silver producers were awash with the metal and it was hoped that this new agreement would create more jobs within the mining industry.

A series of other legislative efforts either repealed earlier bills, and/or furthered the requirements of the U.S. Treasury to purchase silver to support the market or to use in the production of silver coinage.

For the next seventy years, the U.S. government ramped up its efforts to control the price of silver. It offered to buy silver at artificially high prices which in turn over-stimulated production of the white metal. This was pleasing to voters in silver mining states. But in the process, the U.S. government acquired a stockpile of over two billion ounces of unneeded silver.

All the while, the market price for silver continued to decline. In 1887, the average annual price of silver dropped below $1.00 and by 1932, at the depths of the Depression, reached a low of $.25 per ounce.

Also concurrent with this, the gold-to-silver ratio continued an upward march. By the time silver reached its Depression era low of $.25 per ounce, the gold-to-silver ratio had risen to 80-to-1 ($20.67 divided by $.25). By 1940, the ratio had risen to an all-time high of 97-to-1 ($34.00 divided by $.35).

Silver’s primary value as an industrial commodity asserted itself beginning with U.S. involvement in World War II and the gold-to-silver ratio began a gradual decline that lasted for twenty-seven years reaching a low of 16-to-1 in 1968.

After that, and coinciding with free markets for both gold and silver, the ratio proceeded to climb all the way back to near 100-to-1 in 1991. There was one, very brief, period of six months between July 1979 and January 1980 when the ratio fell from 32 down to 16 but was back up to 40 almost immediately after that.

Silver investors who are depending on a declining gold-to-silver ratio are betting that silver will outperform gold going forward. But, if anything, the chart (see link above) shows just the opposite. For the past fifty years, the ratio has held stubbornly above a rising trend line taking it to much higher levels.

The last spike of any consequence below that trend line happened in 2011; and lasted all of three months.

Other than that, any downward moves of significance in the ratio were from much higher levels. And, to add further discouragement, some favorable – for silver – changes in the ratio occurred with actual silver prices either in decline or already at much lower levels.

Gold and silver are two different items with their own independent functions and uses.

Gold is real money. Silver is an industrial commodity with a secondary role as money.

The gold-to-silver ratio that existed one hundred fifty years ago was mostly the result of political influence and appeasement. It was an arbitrary number.

It might be reasonable to expect a ratio for purposes of consistency and uniformity within the existing monetary system. However, the price used for silver at $1.29 per ounce was considerably in excess of the current (then) market price. It was an early form of price support.

There is no fundamental reason which justifies any particular ratio between gold and silver.

(also see Hi Yo Silver! Sort Of… and Silver Is Not Real Money)

By Kelsey Williams for Safehaven.com

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