Friday, August 27, 2010

Is Silver Too Cheap In Comparison To Gold?

Silver and gold are known as precious metals. This is because they are and have always been considered precious. Something can be considered precious if it is extremely rare or highly valued or of great worth. With gold recently reaching a price of $1240 per troy ounce, this would meet the definition of highly valued and great worth.

Silver on the other hand is currently trading at just $19 per troy ounce. When compared to gold, silver doesn't look so highly valued and doesn't really meet the definition of having great worth. I'm sure you don't consider 20 bucks to be a large sum of money. $1240 on the other hand is quite a bit more impressive.

Looking at it another way, silver is currently worth approximately 65 times less than gold. Or gold is 66 times more valuable than silver. So the gold to silver ratio would be 65. Does this mean that gold is 65 times more rare than silver? Well, as I previously wrote on this site, above ground refined silver is rarer than gold.

Above ground refined silver and gold are gold and silver that have been mined from the earth and put into a tangible form such as jewelry, coins and bars. I find this to be quite remarkable.

If you look at the historical ratio of gold in terms of silver, it used to be about 16 to 1. Meaning gold used to be about 16 times more valuable than silver. Not surprisingly, historically there was about 16 times more silver mined each year than gold.

How about now? According to the Silver Institute, silver production from mining in 2009 was up 4% to 709.6 million ounces. That would put 2008 annual silver production at 682 million ounces. According to Gold Sheet Links, annual gold production for 2008 was approximately 76 million ounces. This would put the current silver to gold production ratio right about at 9. So 9 times more silver is currently being produced than gold.

Silver and gold have both been used as money and a store of value throughout history. In fact, up until 1964, the United States used 90% silver coins as our circulating currency. So getting back to the point, how can silver logically trade at such a small fraction of the price of gold when it is 5 times more rare in above ground available form and only 9 times more available on an annual production basis?

This leads me to believe that silver is extremely cheap in comparison to gold. I believe silver is extremely undervalued at this price.