Reexamining the Gold/Silver Ratio One Year After the 200 Metric Tonne Sale of Gold to India from the IMF

In early November 2009 the International Monetary Fund (IMF) sold 200 metric tones of gold for US $6.7 billion. India’s average price was about $1,045 an ounce. Gold will not go below the $1,045 (let’s say the $1,000 level) for a long, long, long time. Having this benchmark set, one can now begin to re-explore the gold/silver ratio having a basement for one of the four variables (gold high/low and silver high/low).

In early November 2009 the International Monetary Fund (IMF) sold 200 metric tones of gold for US $6.7 billion. This was done as a diversifying hedge against a falling dollar. The sale of the gold was not surprising, nor was the purpose of the purchase; however it was the purchaser – India - that was stunning. Most people bet on the Chinese horse! India is a gold rich culture. Golden jewelry is and always will be a huge component of Indian life. As governments are just bastardized businesses, they need to be savvy. So, India firmly believes they were getting a deal. India’s average price was about $1,045 an ounce. Gold will not go below the $1,045 (let’s say the $1,000 level) for a long, long, long time. Having this benchmark set, one can now begin to re-explore the gold/silver ratio having a basement for one of the four variables (gold high/low and silver high/low).

Using this $1,045 as a fixed data point, on November 3, 2009 silver was just about $17 per ounce. This gives a gold/silver ratio of 61.47 (1045/17). Now gold is $1,364.20 and silver is $26.70 resulting in a ratio of 51.09.

Naturally there is about 16 times more silver in the Earth’s crust than gold.

Historically this ratio has been:

  • 2007 – ~51
  • 1991 - ~100
  • Late 1800’s – fixed ratio of 15
  • Roman Empire – fixed ratio of 12
  • 323 BCE (the death of Alexander the Great) – fixed ratio of 12.5

Extrapolating, it seems we are back to around 2007 levels, a time when gold rose above the $1,000 level and didn’t look back. Silver has been playing catch up and seems to have caught up. For as long into the future that I can see, I cannot see the world pegging the ratio to any constant. Alexander the Great’s reign was a long time ago. Bringing this back to the Indian gold purchase, they set the bottom, in my opinion.

Although it may seem arcane and archaic it is worth investigating when there are extremes. In 1991, at a ratio of 100, something had to give. As we have seen, 61 is a bit high. While around 50 is a nice round number, it is not the dogmatic end-all as the ratio may get lower.

Monumental events in one of the two metals affect the other.� The media and masses tend to focus on the one mentioned and neglect the latter. Understand the effect and invest in the forgotten metal and one will do well.

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