Is silver trading at a discount?

While trending down from ATH of 125 from last year, the Gold-to-Silver Ratio (GSR) remains at an historically elevated level of 78 at current price levels. This means that you can trade in a single ounce of the yellow metal, and get more than two kilos of silver back. In dollar terms though, Silver is probably the only thing you can buy today for less than it was in 1980. 

In comparison to March 2020 levels, one may think that Gold to be undervalued relative to its cousin on the periodic table. However, in terms of sheer supply on the planet, Keith Neumeyer of First Majestic Silver has frequently reminded precious metals investors that the ratio in the ground is 8:1, other commentators have argued that the geological ratio may be more like 15:1. Either way, those ratios are a far cry from 78:1. 

The ratio is the longest standing trading pair, with a set rate being set by governments for the purpose of monetary stability. The ratio was set at 12:1 by the Roman Empire

It remained at that level during the Middle Ages and was set at 15:1 by the US Government with the Coinage Act of 1792. The act also set the US Dollar as the national currency of the fledgling nation, and established Eagles ($1), half eagles (50c) and quarter eagles (25c) in gold; the dime (10c) and half dime (5c) in silver; and cents and half cents were in copper. For a long period, money was stable and dependable. As classical economist David Ricardo wrote in 1816, “A currency, to be perfect, should be absolutely invariable in value”.

Gold-to-Silver Ratio from 1830 to today

As you can see, the rate was stable initially, but floated from 1873 when the silver market was flooded and the commercial value of silver fell far below the stable ratio.The GSR elevated during WW1 and WW2, before dropping back down. Discounting the wisdom of the ancients at our peril, if considering only the last 200 years, we see an average of 51:1, with a clear base at 15:1.

Is the GSR still relevant?

The arguments for buying silver as it is historically undervalued are clear. However, one argument that people put forward in favor of gold still being a better investment is that a return to a gold standard would most likely be a digital currency backed by gold. In bimetallic monetary systems, silver has essentially been “fractional gold”. While 1/100th oz gold (below) is available for a similar price to an ounce of silver, getting smaller denominations needs silver. If transactions are digital, and gold is being held as a reserve for that currency, then the need for divisibility is already solved. The divisibility of Bitcoin has been one of the major reasons it has, for many, earned the moniker of “digital gold”. Unbridled speculation aside, the GSR has long been a reference point for all precious metals investors.