What is in Gold-Silver Ratio?

There are interesting digressions going on in silver and gold plays, which reveal a sizzling opportunity as far as investing is concerned. Historically, price of gold and silver has been 16:1, based on the assumption that the availability of silver on earth is 16 times more than gold, or availability of gold is 1/16th times  that of silver. So, theoretically the price of gold to silver should not rise beyond 16:1.

 

The Ground Reality

 

1. Annual mining of gold is 80 million ounce, versus 750 million ounce for silver. Annual recycled amount is 50 million oz. and 250 mill. oz. for gold and silver. So, in total, market availability is 130 million oz. for gold and 1,000 million oz. for silver. This gives us current availability ratio of 8:1 for silver and gold.

 

2. Not all gold and silver are available for investment purposes, due to their various use in industrial applications. For investments (jewellery, bars and coins), the annual availability of gold and silver is roughly 120 million oz. versus 350 million oz. So, real availability ratio of silver and gold is 3:1.

2. In reality, investors are allocating their investments between gold and silver in totally different way. Actual Sales of silver in 2012 was 33,742 million oz., versus 744 million oz. for gold. This gives us a sales ratio of 45:1 for silver to gold.

3. Whereas, availability ratio for silver to gold is 3:1, sales ratio is 45:1 in physical value and 55:1 in dollar value. So, investors choose to buy silver at a ratio that is well above what is available.

	GOLD	SILVER	RATIO
Annual Mining (mill. oz)	80	750
Recycled (mill. oz.)	50	250
Total Availability per year (mill. oz.)	130	1,000	8X
Available for Investing (mill. oz.)	120	350	3X
U.S. Mint Actual Sales in 2012 (mill. oz.), partial data	744	33,742	45X
Investments Value (Billion $)	9,000	150	60X
Market Price (in USD) on Dec.28,2012	$1,656.30	$30.00	55X

 Source: World Gold Council (http://www.gold.org/) , U.S. Geological Survey (http://www.usgs.gov/) and Silver Institute (http://www.silverinstitute.org). Market Prices taken from (http://www.cmi-gold-silver.com/gold-silver-daily-spot-prices/).

How Prices are determined?

The silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. This is against the daily average mine production of about 2 million ounces!  So, no surprise that the price of silver is such severely manipulated!

The investment market for silver is smaller. While the dollar value of gold in the world approaches $9 trillion, the value of investable silver is estimated at around $150 billion. This is a ratio of 60:1 in dollar terms.

Where is the Market Moving Ahead?

Like we said, historically price ratio of gold and silver is 16:1, Today this ratio is 55:1. So, what are these numbers telling us? In all likelihood this price level cannot be sustainable, silver being such severely underpriced. Those who are smart investors and follow the market, they will be rewarded. Expect a super bull market for silver ahead.