Seeking Alpha
Matthew Green
As gold enjoys the strongest bull market it has seen in a generation, many commentators have pointed to its secular climb upward via measures such as the Dow priced in gold and the accompanying ratio. The Dow/Gold ratio since 2000 clearly illustrates the strength and resiliency of precious metals this past decade and carries implications for the next few years for precious metal’s as a store of value through these uncertain times.
For those with a higher risk tolerance, there is another ratio that could provide useful insights. The gold/silver ratio points to silver as being undervalued when one considers its historic performance, but particularly during commodities/precious metal bull markets. Regardless of other factors, (including the alleged manipulation of silver) silver’s industrial uses and its current price relative to gold indicate silver could potentially offer more robust returns for the duration of the bull market in commodities. Knowing the history of this monetary ratio within the history of the U.S. is helpful in understanding its relevance today.
Silver is about 17.5 times more abundant than gold in the earth’s crust (.07 parts per million to .004 ppm, respectively, according to the U.S. Geological Survey). This ratio was recognized by civilizations as currency systems were developed over time. Thus, in 1792 the newly formed U.S. Congress passed the First Coinage Act. The Act officially established the Dollar as our currency, defining one Dollar as a weight of pure silver, 371.35 grains to be exact. A Quarter Eagle ($2.50), was defined as 61.875 grains of gold. The Act legally set the gold/silver ratio at 15.
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