Why America fixed gold-silver ratio in 1792

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March 19, 2009

Commodity Online
MUMBAI: When the world is riding a gold boom, there are questions about the fate of silver prices and investors who put money on silver.

It is interesting to track the gold-silver relations during the past. If you check history, the price of silver has been notoriously volatile as it can fluctuate between industrial and store of value demands. At times this can cause wide ranging valuations in the market, creating volatility.

Silver often tracks the gold price due to store of value demands, although the ratio can vary. The gold/silver ratio is often analysed by traders and investors and buyers. In 1792, the gold/silver ratio was fixed by law in the United States at 1:15, which meant that one troy ounce of gold would buy 15 ounces of silver; a ratio of 1:15.5 was enacted in France in 1803. The average gold/silver ratio during the 20th century, however, was 1:47.

From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per troy ounce but reaching $14 per oz. for the first time by late April 2006. The monthly average price of silver was $12.61 per ounce during April 2006, and the spot price was around $15.78 per ounce on November 6, 2007. As of March 2008, it hovered around $20 per troy ounce. However, the price of silver plummeted 58% in October 2008, along with other metals and commodities, due to the effects of the credit crunch.

In March 2009, the gold-silver ratio is 72:1. This means that at the current price of silver it takes 72 ounces of silver to buy 1 ounce of gold.

Due to the safe haven buying of gold and its continuous rise in value, gold has been gaining against the price of silver.

The price of silver has weakened due to a drop in global demand that resulted from the global recession. The price of silver tends to drop faster than the price of gold during a recession because silver is seen as more of an industrial metal than a precious metal.

As the global economy sank into recession in December of 2007, the gold-silver ratio began to rise from 50:1 to 80:1 tracking the deepening global recession. Extreme price moves in the gold-silver ratio are not uncommon and the moves tend to track the direction of the global economy.

If you check data, you can find that the gold-silver ratio fell to 17:1 in 1980 and rose to 100:1 during the 1991 recession.

As the global economy recovered in 2003, the ratio fell from 80:1 to 45:1. The direction of the gold-silver ratio reflects investor sentiment about global growth and recession.

The current global recession reduced demand for silver and increased safe haven demand for gold and the current ratio is near 72:1.

However, this year, it seems, the ratio between gold and silver is expected to peak. Since the global economy started showing signs of recovery from the slump, the gold-silver you are seeing now may be the highest for sometime to come.

When the global economy starts to recover, investors may begin to buy silver and the gold/silver ratio may revert to 50:1.

Across the broad landscape of globally listed mining companies, silver bullion miners, developers and explorers are less wanted than anything else now.

Silver bullion itself is 56% off its highs, seen in March this year. But, amid the apparent dire state of affairs for both silver bullion prices, and stocks operating in the silver space, bullish comments and forecasts remain the order of the day.