The “Gold/Silver Ratio” is a ratio that has been used to compare the relative performance of gold versus silver for many years.

Historically, the normal gold/silver ratio has always been approximately 1/13.5, or in other words, 13.5 ounces of silver would buy one ounce of gold.

Geologists tell us that silver occurs naturally in the earths crust at a ratio of, you guessed it, 13.5 times more often than gold.

It doesnt take a great leap of intelligence to deduce that yes, it makes sense that the market ratio would be about 1/13.5

For a handful of years, however, we have seen this ratio greatly askew.

Today we find that it takes  as high as 85 or 90 ounces of silver to buy one ounce of gold.

Anyone who has studied these markets knows this is highly out of whack, and must, at some point, correct to the norm.

More importantly, history shows us that markets do not just correct, but they over-correct. Meaning that if the normal gold/silver ratio is 1/13.5 then when it over corrects there stands a good chance the ratio will may look like something along the lines of 1/10, or 1/8, some analysts even think we will see 1/5 and 1/2, some even think we will see 1/1.

What does this mean for the price of silver?

Well I will give you an example.

If we see gold go to $2000 an ounce, and the gold/silver ratio ends up topping at 1/10, then that would give us a silver price of $200 an ounce.

Sound far fetched?

Tell that to the wealthy clients who are ordering multiple millions of dollars of silver at a time.

This entry was posted on Wednesday, January 7th, 2009 at 2:49 pm and is filed under Archived. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.