When Gold Booms, Should You Buy Silver?
Gold and silver are perhaps the two most well-known investment vehicles across the globe. Their ability to hold a store of value has lasted centuries. Let’s suppose one had to decide on whether to buy and hold gold or silver for the remainder of 2019. Which one would you choose?
It is, of course, no easy question. The price of silver has had a rough start through the first half of 2019. Silver started the year at $15.47. On July 5th, silver stood at $15.28. The best that can be said of silver through June 2019 is that it has generally kept its value. Of course, not losing money is not the same as making money.
Gold, on the other hand, has had an awesome start to 2019. The price of gold started the year at $1,282. As of July 5th, the value of a troy ounce of gold has zoomed to $1,414 per troy ounce. That is a 10.3 percent return through just six months of the year.
Behind this runup in the value of gold is a hedge against inflation, concern about the global economy, increased central bank demand, and potentially new forms of industrial use. The year of 2019 has so far been nothing but great for holders of the yellow shiny metal.
The Gold to Silver Ratio and the Price of Silver
The strength in the price of gold and the relatively flat performance of silver begs the question at hand – When gold booms, should you buy silver?
The answer is a “strong” probably. The following figure is the evidence.
The top portion of the chart, in orange, is the price of gold divided by the price of silver. This is commonly known as the gold to silver ratio. As shown, the ratio has ranged from a low of 31 in 2011 to a high of 93 recently.
The bottom part of the graph has the price of gold and the price of silver. The price of gold, in yellow, corresponds to the left axis. The price of silver, in silver, goes with the right axis.
There are three lines on the figure. The first line is for June 5, 2003. This is when the ratio of the price of gold to the price of silver reached a high of a little over 80. Interestingly, when this happened, silver had a prolonged period of price growth.
The second line is November 21, 2008. The gold to silver ratio was around 85 and the price of silver was $8.90. Since that ratio peaked, silver went on a tear. The price of silver went from $8.90 to a high of $48.70 on May 2, 2011. That is a gain of almost 450 percent over just 2 ½ years. Incredible.
The third line is February 29, 2016. The gold to silver ratio peaked at about 84. After peaking, silver went from around $15 to almost $21 over the next six months. Another incredible run.
The Ratio Today
Where does the ratio stand today? The gold to silver ratio is at 93, approaching the early 90s all-time high. If this ratio is any guide, silver is due for some hefty price gains in the coming months.