Why Silver is Undervalued Relative to Gold

If you're one of the growing number of investors who believe a financial meltdown is likely, you've probably been looking at gold. If so, you may also want to consider silver. Dozens if not hundreds of articles have been written on why silver is undervalued relative to gold. Some of the more compelling reasons put forward are:

• Silver stockpiles have been low for years, with demand constantly outstripping supply.
• One of the major factors that depressed prices is gone. The US government will no longer be dumping billions of ounces of because their stocks have been reduced to virtually nothing.
• Because of low silver prices, there has been little exploration over the last decade so supply will take years to catch up.
• More and more people want the security of physically owning precious metals and silver is much more affordable to buy than gold.
• There is more physical gold in the world than there is silver
• Most silver is mined as a by-product of mining gold, copper, lead or zinc. Pure silver mines are rare.
• Short positions in silver are huge, which when covered are going to cause the price to skyrocket.

And there are many other reasons. But one stands out above all others. The ratio between gold and silver prices - historically around 15 to 1 - is way out of whack. Just look at the chart. The ratio has been slowly falling for years. The trend is inarguably down. You can see on the chart since 1991, the ratio went from around 100 to well under 50 in 1998, back up to 80 last year and then fell dramatically over the last 6 months. It now stands a bit over 60.

The dateline on the article shows that it was written on Feb 20, 04. The ratio referred to in the article has fallen from over 60 to around 57.5.

How far will the ratio fall? Hard to say, but in the words of Oliver Wendell Holmes: "When I want to understand what is happening today or try to decide what will happen tomorrow, I look back." When you look back at gold and silver through the centuries, the ratio has been remarkably consistent, hovering around 10, 11 or 12 to 1. But during the 1900's, it had climbed to around 15 or 16 to 1, where it stood until 1980 when gold began to soar and silver did not keep pace.

Will that ratio of 15 to 1 return? Why not? That's what it was for hundreds and hundreds of years. The last 25 years have been a freak occurrence. What was it that changed to cause the ratio to climb the way it did? Absolutely nothing, other than artificial forces in the market keeping the price of silver down. But in the end, supply and demand always come to the fore. So will historical precedent and market forces prevail to bring the ratio back to 15 to 1? Why not? Which means when gold gets to $800 an ounce, as many observers believe it will, silver will be $53.33. And if gold gets to $3000, as some experts predict, silver will be $200 an ounce. Either way, today's price of silver could be one of the best investment bargains around.