Comparison Shopping

December 20, 2000

Here it is the Holiday Season again, and if you are not much of a shopper you will probably wait until the last minute to complete it as I will. You may even shop as I do, more with a goal of finishing than really comparing and receiving the best value. However, it is a holiday shopper's responsibility to compare and arrive at the best "gift" at the best price all factors considered. Since my main focus is that of a precious metals analyst, particularity silver I thought it would be appropriate to do a little comparison between the two primary precious metals gold and silver. Much has been discussed of the gold to silver ratio. In fact you can hardly discuss the subject with any serious silver investor without the subject surfacing. Discussions usually involve the "proper" ratio of silver to gold. Many will submit that the proper ratio is somewhere in the 15 to 16 ounces of silver to gold area. In other words fifteen ounces of silver would purchase one ounce of gold. This belief is usually founded on the fact that this was the accepted ratio while the United States was on the bimetallic system. However, I prefer to take a much longer view and see if we can discover any facts that might help us in the future.

If we study the Gold/Silver ratio over the last one thousand years here is what we find. From 1000 to 1250 the Gold/Silver ratio was around ten to one. From 1250 to 1850 the ratio was sixteen to one or less. So, for most of the last millennium the ratio has fluctuated between 10-to-1 and 16-to-1, but in cultures where both gold and silver were used as money. From 1850 to present the ratio has varied widely, hitting a high of 100 to 1 on two separate occasions. Once in the 1940-1941 time frame and once again in 1991.

Estimates of the present world gold supply vary but most agree upon a number of approximately 4 billion ounces. Of all the gold mined very little has been lost. In 1992, Charles River Associates, estimated world silver mining for all of recorded history yielded an amount of 38 billion ounces. This establishes a natural ratio of ten to one. What I mean by a natural ratio, is the ratio which both metals are found in nature. For every ten ounces of silver dug out of the ground one ounce of gold is dug out of the ground. In recent times the ratio has been tapering down and now stands at about a seven to one ratio.

Now if we look at the irrecoverable loss of silver during the past centuries we will have a much different ratio. In fact the above ground supply of silver equals total cumulative mine production less the amount of metal that has been 'lost' over the same time period. Much of the loss is due to industrial use of silver in applications that are vital to the modern world. These include; computers, television, film, electronics, optics, water purification, solar energy and the list goes on and on. How much silver has been lost is difficult to determine, however for sake of argument I will not even guess how much silver is unavailable to the market due to it's indispensable application. What I will focus upon is the total identifiable silver stocks as published by the GFMS Silver Survey 2000 (page 29) as 700 million ounces. This number implies all known silver as reported by Gold Fields Mineral Service. However, before the silver bears jump on my case let me account for some unidentifiable silver supply. So, just to be on the safe side I am going to add 300 million more ounces to be conservative, for a total of one billion ounces of silver. Here is where this discussion should light a fire under the reader. The impact of this is very significant indeed. It means that silver's above ground supply is one fourth the above ground gold supply. Silver is actually more rare than gold at this time in history. What does this mean for our ratio? Do we now have a possible Gold/Silver ratio of 0.25 to one. What ? Identifiable silver stocks are four times more rare than gold stocks. Wouldn't this imply four ounces of gold are needed to buy one ounce of silver? This is hardly the situation today as anyone can verify. The current ratio is approximately 55 to one. It takes about fifty five ounces of silver to purchase one ounce of gold. Another important point is this ratio has averaged around 57 to 1, for the past decade.

What can this brief study teach us? For one it can imply which is the most undervalued of the two metals. It also shows which metal has the greater potential to accelerate in price terms as the market becomes tighter ( more demand).

We can also look at the metals ratio in terms of current price. Today we have gold around $270 per ounce and silver near $4.65 per ounce. If we look at how far each has moved in the market place we need to establish a reference point. If we look at the gold fix of $35 per ounce after the official dollar devaluation under Roosevelt, we find silver was officially at $1.29 per ounce. So, moving to modern money gold has increased by a factor of 7.7 times (35x7.7=270) and silver has increased by a mere 3.6 times. Does this mean silver has some catching up to do?

So, now we have some facts and history to use to our advantage. If one looks at both silver and gold and does some comparisons we find the silver supply is less than gold. Most of the gold ever mined is still with us, most of the silver ever mined is gone. The above ground supply of silver amounts to roughly one year's demand. The silver producers and recyclers will not be able to meet the demand because silver has been in a deficit of about 10 million ounces per month for the past ten years! In other words, there is not enough silver available from any source to meet this demand. Can we conclude that silver is currently underpriced relative to gold?

I am not sure what the reader will conclude from this article but as for myself, I have some more Christmas shopping to do and I am thinking of giving something rare and beautiful this year, and not too expensive either.

David Morgan

20 December 2000

David Morgan ( is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here

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