I thought this was very interesting This chart is the gold to silver ratio (gold/silver) from 1792 to 2005 I am not sure of all the dynamics at play here, but look how long a period of time the gold / silver ratio was 16:1 ... nearly 80 years from 1792 to 1872 ... and touched 16:1 again in 1920, 1968, and 1980. Also look how the peak ratios of over 90:1 look a bit like transient bubbles (two peaks almost like a double top) If we ever returned to a 16:1 ratio (which I am not saying we ever will) and gold held at todays prices of $1,394 ... that would put the "fair value" of silver at $87 an ounce If we just fell back to a more median 35:1 ratio (which i think is what we had in the 1920's when we were still making legal tender gold and silver coins) and gold held at todays prices of $1,394 ... that would put the "fair value" of silver at $40 an ounce Interesting food for thought
You can go back 5,000 years and see the exact same ratio as well. You make a good point about the ratio being out of whack. I have argued this as well, but the problem is that we do not know if the price of silver should be $87 or the price of gold should really be $416, right? I think the two markets are now disconnected. People used to value both of them equally and exchanged them on their rarity. This was a very European idea by the way. The 16.1 ratio never held in other cultures, and nowadays you have cultures who value gold above all else and have little use for silver, (East Asia and India). Because this is the case I do not think the very historical ratio really has any bearing anymore, though it is still very true that this is the rarity of the metal in the earth.
I think that silver is more of an industrial metal (and sort of a secondary currency/store of wealth) ... the problem with silver is if you buy $20,000 worth of the stuff ... you can't carry it (or store it easily) Gold is more of a surrogate currency (you can easily carry or store $20,000 worth) If you are india or china ... it's much easier to store a $100 million of gold than silver! Still I like that silver has an industrial use ... sort of gives you two ways to have the price increase. and of course the price of silver gives the middle class the chance to own something hard (as most middle classs people might struggle to dig up $1,500 to buy a gold eagle but they could dig up $100 to buy a 1/4 pound of silver coins)
There is nothing mysterious about this. From 1792 until some time after the Civil War, the US Dollar was defined as X amount of silver (too lazy to look up the exact amount but see the coinage act of that time). From that basis Gold currency was defined to have an ratio of 16 to this amount. If you look at the weight of a gold coin and it's face value verse that of a silver dollar, you will find this exact ratio. After the Civil War, this ratio was relaxed and of course completely as we progressed to complete fiat currency. The gyrations really start to increase once the Federal Reserve was created in 1914 and the dollar was no longer defined in terms of metal.
The ratio was not "relaxed". If you go back and read US coinage history this ratio changed based upon changing exchange rates in the world mainly due to US metal finds. Silver became more valuable after the US gold rush, silver depreciated when the Comstock load was producing. Look at 1853 and 1873 coins and why they changed sizes. ALso look at gold versus silver content of our denominations when we produced both. This will demonstrate we did not "relax" any standards while our coins were made of these metals. The US always had the highest reputation in terms of our coinage. Chris
You don't understand. By relaxed I mean the definition of the dollar started to include currency that wasn't based in metal. The US government had issued complete fiat currency during the Civil War (in order to pay for it) and this money still circulated along side the gold and silver dollars. What is missing from the chart above is how that ratio calculated. I assume it was with the present "concept" of the dollar since the metal based definition has been gone for close to 100 years. With that in mind "relaxed" means the dollar was no longer defined completely by metal.
Ok, that could be a fair point. The divergence between a metal money economy started to divurge more during the Civil War due to demand for money to fight the war, though bank notes started long before that, and Continental and Colonial currency even before that. It really has been a long time since only PMs were money.
The 16:1 gold:silver ratio was artificially established. It will likely never be back. Silver could get $50/oz in the next few years but if it does, you can bet gold will be $2000. That would bring the ratio down to 40:1 which is probably as low as we'll ever see again.
The problem with comparing ratios is that (a) 16:1 was a fixed price way back when, (b) it doesn't account for the variance in demand, and (c) it doesn't account for the variance in supply. In short, and in my humble opinion, the gold:silver ratio is completely useless.
Well, I find it interesting that hundreds of cultures all over the world with no interaction have all settled on a 16:1 ratio. Kind of hard to say it was fixed by anyone. It is an excellent approximation of the ratio of the ores in the earth. That is why this ratio was in force for thousands of years. Yes, its useless now for reasons I have posted, but it is and was a real ratio of these metals relative rarity. Does that information have any bearing on what either will do tomorrow in absolute terms or relative to each other? No.
The actual mined ratio is much lower than 16:1 (today it's about 1/2 that, or just over 8:1, IIRC). I am not aware of the actual ratio in the earth -- do you have a source? The closest I could find suggests that the ratio is 4:75, or roughly 1:20. http://en.wikipedia.org/wiki/Precious_metal That said, I was not aware that a fixed ratio was used for "thousands of years", but I know it was fixed by law in the US, and once that ended you see the spikey graph that resulted (which shows what the market, rather than law, decided).
