Would you buy gold or silver? Getting my head around the gold to silver ratio!!

in GEMS2 years ago

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WHICH WOULD YOU CHOSE?

There are many people suggesting that the gold silver ratio is nearing a top at present, and although I am a big silver fan, I am not of that opinion and consider that it will keep climbing for the next 10 years at least. Below is a chart of the gold silver ratio

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As you can see, the chart shows that the gold silver ratio hit an all time high of 125.89:1 on the 18th March 2020, and has since declined back to 111.81 (16/4/20). It is likely that over time it will retest and actually break through the recent highs and then keep on climbing.

To understand why the gold to silver ratio is going to keep climbing, we need to look at how gold and silver are used.

What do we use Silver for??

Below is the breakdown of the percentage usage of silver:

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As you can see from the pie chart above, 45% of all mined silver is used in photography and electrics. The "other" category which equates to 24% is a mix of energy use, brazing and soldering, chemical production, mirror production and medicine. So in total therefore, 69% of ALL newly mined silver is used in industry, with only 31% used in jewelry and coins (silver kept in circulation).

How do we use Gold??

Below is a breakdown of the percentage uses of gold:

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So we can see from this chart that industrial use of gold is only 37%, but 58% is used in coins and jewelry (gold kept in circulation), the primary use for gold is opposite to silver.

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So what does this mean?

Since silver is primarily used in industry (69%), silver is much more sensitive to the strength of the economy than gold is. If we look at what is happening around the world today, we see that the last economic cycle was the weakest in modern economic history.

Taking the "powerhouse" that is the USA, we see that real potential GDP was only 1.6% from 2008 to 2018. This is the lowest 10-year rate since before the Second World War. The gold silver ratio is therefore doing exactly what you would expect it to do in a weak economic backdrop. It is steadily rising as the economy become weaker and weaker. If the economy remains weak after the present recession, I would expect that the gold to silver ratio continues to rise.

The trillion dollar question is now, will it remain weak???

According to the latest Hoisington Investment Management - March report,conclusion is that growth and inflation will remain weak, despite the massive money printing and stimulus presently being rolled out by government around the planet. I agree to some part with this analysis, but believe other contributing factors have an influence to the debt and death, fist printing, pyramid scheme. Below is a long-term chart of US GDP:

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As you can see, growth peaked during the second world war and has been steadily falling ever since. Since the end of the war, average growth has been falling at .7 of a percent every 10 years. As the global governments and central banks are insistent on bailing out all industries and companies, productivity will remain low. Productivity remains low because weaker companies will not be eliminated and allowed to fail, and prevent a re-allocation of the capital from the weak to move to the strong.

So what does this all mean?

For investment (not trading) purposes, it is clear that if the gold to silver ratio keeps climbing, gold will outperform silver on a long-term basis. It may well be that the gold to silver ratio trades lower in the short term and that flipping gold to silver now may be smart, but it is not the way to go if you are a long term investor.

So, if like me, you like precious metals to help diversify your portfolio, you should buy gold and not silver...... Lock it away for a few years and forget about it.

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With gold out pacing silver in $ percentage gains, it is therefore clear that gold miners should outperform silver miners, and that this may be another channel for investment.

DISCLAIMER - I presently have no exposure to any silver or gold mining stocks.

Don't be fooled into thinking that just because the gold to silver ratio has hit a high and is now falling that it will mean revert. We are in a low growth environment for the foreseeable future and the ratio will behave accordingly!

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I was just about to get my next pile of silver... and was unaware that the ratio recently hit na all time high. Very good post mate!

Thanks for the comment. I've kinda lost my mo-jo for actually writing decent posts lately, but enjoyed talking about gold and silver again.

I'm still heavily invested in SILVER, with only a few oz of gold. I can see a time where sub 40:1 is back on the table and I'll be flipping my silver for gold at this point. If someone offered me 115 oz of generic silver bullion for 1oz of gold today..... I probably still would take that deal, and completely counter everything I just wrote about. Hahahaha

I am exactly like you, heavily invested in silver but with a few oz of gold. I am waiting to swap my silver for gold when (if) the ratio reaches 50:1. I am just waiting, even after reading your excellent article...

We are mining for silver it’s so cheap.

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