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Physical Silver Represents Amazing Value

According to the Gold-to-Silver­ Ratio (GSR) and its historical performance, silver (whether in physical form or through an alternative trading instrument) represents amazing value relative to gold at current market prices.

The GSR[1], which is the relative comparison of the international gold spot price against the international silver spot price, plays a unique role in signalling to interested stakeholders important information about:

  • both the gold and silver markets; as well as

  • market sentiment as it relates to inflation and economic and financial market risk.

More than 12 months ago, I outlined the thesis of those individuals who are extremely bullish about physical silver through an article entitled ‘Can physical silver change your life’.[2] This article detailed 7 key reasons why acquiring physical silver bullion in the lead-up to the upcoming economic crisis may result in significant windfall gains.

In my previous article, the GSR was mentioned as one of the 7 key reasons for why individuals should be bullish about silver given that the GSR was suggesting that silver at this point was significantly and relatively inexpensive.

In this article, the GSR is explored in further technical and historical detail especially given the behaviour of the GSR over the past 12 months.

The Historical GSR Relationship

Throughout history when various countries have operated under either a gold or silver monetary standard, an explicit GSR relationship could be found within these economies based on the value that physical gold had relative to physical silver[3].

According to world renowned silver expert David Morgan[4], the GSR has historically been determined through market forces at an approximate ratio of 15 to 1, although the GSR would vary by region and time period and in some instances a GSR of 1 to 1 would be achieved[5].

The GSR across various economies has historically been determined by a variety of metrics including:

  • the ratio in which physical gold is mined to relative to silver on an annual basis; and

  • the ratio of known available tradeable gold in circulation relative to the known available tradeable silver in circulation.

Based on these metrics, various analysts have expressed what the GSR should be at the moment.

For example, Keith Neumeyer the Chief Executive Officer of First Majestic Silver Corporation has stated that the GSR should be 9 to 1 given that for every one ounce of physical gold that is mined, there is 9 ounces of physical silver that is mined. Others have suggested that the GSR should be less given that approximately 50% of annual silver mining production is used for industrial purposes rather than for investment purposes[6].

Some analysts even suggest that the GSR should be on 2.75 to 1 basis given that the current above ground stock of 0.999 fine physical gold bullion is approximately 6.87 billion ounces[7] in 2019 whereas the current above ground stock of 0.999 fine physical silver bullion is approximately 2.5 billion ounces[8].

The Key Market Phenomenon of the GSR

In the modern Australian context, the GSR tells a unique story about the relative value of silver indicating at points in time when physical silver may be cheap and when it may be expensive.

Using silver price data expressed in Australian dollars, we are able to see that from the late 1970s and prior to calendar year 2019, there have been 5 distinct occasions where the price of silver rallied with those years being 1980, 1983, 1987, 1998 and 2011 as shown in Diagram 1 below.

During these specific rallies in the price in silver, a corresponding fall and bottoming of the GSR was also observed which is shown in Diagram 2.

Diagram 1: Silver Prices expressed in Australian Dollars

Diagram 2: Gold to Silver Ratio based on Australian Dollars

The market relationship which can be deduced from Diagrams 1 and 2 is that the highest price in silver achieved during a bull market rally also corresponded either close to or on the day with the lowest GSR achieved during that rally.

The dates of when the Australian dollar price in silver peaked and when the GSR bottomed during these 5 distinct silver market rallies is shown in Table 1 below.

What can be observed from table 1 is that in 4 out of the 5 rallies, they being in 1983, 1987, 1998 and 2011, the price of silver peaked on exactly the same day as the GSR bottoming, whereas, there was only a difference of 5 days between the peak silver price in January 1980 and the bottoming of the GSR (noting that 2 of these days were weekend days – i.e. the 19th and 20th of January 1980).

The other observable and important fact that can be deduced from the information above is that during these silver market rallies, the GSR bottomed at various ratio values ranging from 15 to 51.5.

The GSR in 2019

Applying GSR analysis in 2019, one can observe that the GSR achieved a 27‑year high during calendar year 2019 reaching 93.32 on 10 June 2019 as outlined in Diagram 2 above.

From this point, the silver market rallied via a 32% price explosion from $AUD 21.83 per ounce on 10 June 2019 through to $AUD 28.79 per ounce on 5 September 2019 which also saw a corresponding fall in the GSR from 93.32 to 79.3 to the same precise date.

This market occurrence demonstrates that the unique market relationship between the silver price and the GSR as described above was once again observed in 2019.

Subsequently, after reaching the highest silver spot price for calendar year 2019 on 5 September 2019, the spot price of silver expressed in Australian dollars has fallen resulting in a simultaneous rise in the GSR.

Why is the GSR so divergent from physical market dynamics?

Noting the behaviour of the GSR during 2019 as mentioned above, questions naturally arise as to why is the current GSR so divergent from dynamics of the physical gold and silver markets as above ground stockpiles suggest.

As noted in my November 2018 article, leading analysts such as Steve St Angelo suggest that there is a significant mismatch between the value of physical investment of silver versus the quantum of money that is invested within the ‘paper silver market’ (i.e. the notional silver futures contracts markets traded on markets such as the COMEX (as part of the CME Group) and London Bullion Market Exchange (otherwise known as the LBMA).

This discrepancy between demand and supply forces of the physical silver market and the notional paper market has led to a significant distortion in price of silver and subsequently in the GSR[9].

Thus, analysts such as Bill Murphy from the US based Gold Anti-Trust Action Committee (or GATA) argue that the international spot price of silver is artificially low by a significant material amount, meaning that significant windfall gains are likely to be achieved if the distortions in the paper market are corrected.

Future Direction

As the world heads into 2020, weakening economic conditions (including slower economic growth), the further build-up of systemic economic and financial risk as well as additional rounds of fiscal and monetary policy across major economies which includes:

  • further cuts to official interest rates; and

  • new injections of unconventional monetary policy (including extended liquidity operations, quantitative easing and negative interest rates)

suggest that the trend of increasing demand for physical precious metals which has been witnessed in 2018 and 2019 (especially through central bank purchases of physical gold[10]) is likely to continue into 2020.

Such increased demand of gold and silver (both in physical bullion form as well as through the other investment vehicles such as Exchange Traded Funds (EFTs) and market instruments such as the futures market) will provide further impetus for the international spot prices of both gold and silver to rise.

At the time of writing of this article on 21 December 2019, the GSR is at 85.95 which is higher than the GSR of 79.3 registered on 5 September 2019. Based on the historical GSR relationship which can be observed above, silver is relatively significantly cheap compared to gold.

If the price of gold were to rally during 2020 and beyond as some analysts have suggested given the current economic context as noted above, the historical behaviour of the GSR suggests that the price of silver will rise by a larger percentage than the rise in gold resulting in a simultaneous fall in the GSR.

In this context, individuals who own silver may seek to realise their gains via selling their silver position and reallocating their capital to another asset class or may wish to convert their silver into gold (especially in physical bullion form) meaning that individuals may be able to accumulate a larger quantity of gold relative to purchasing gold in the current market.


The GSR is an important market signal which provides insights into the relative value of silver compared to gold and on occasions provide clear signals of whether to:

  • buy or sell gold or silver (whether in physical bullion form or through another trading instrument); or

  • convert silver into gold or vice versa.

As noted in my ‘Can physical silver change your life’ article from November 2018, analysis of gold and silver markets should encompass a whole array of data and thus the GSR shouldn’t be viewed in isolation.

Nevertheless, taking into account the historical behaviour of the GSR and the current GSR, silver at this current point in time is priced in relatively cheap terms compared to gold.

Taking into account:

  • current and expected future economic and financial market conditions;

  • the current economic and financial market risk profile;

  • the expected direction of macroeconomic policy of major economies (especially conventional and unconventional monetary policies); and

  • the dynamics of the physical gold and silver market (including the amount of above ground physical stocks)

suggests that the case for acquiring silver remains extremely bullish.

John Adams is the Chief Economist for As Good As Gold Australia

This article is the sole opinion of the author and does not constitute professional financial advice.


[1] The GSR is calculated by dividing the international gold spot price by the international silver spot price.

[3] The relative relationship of gold vs silver in these countries was typically driven by physical demand and supply forces.

[5] As noted by Michael Maloney in his 2015 book, “Guide To Investing in Gold and Silver”: “In China, during the Ming Dynasty, for instance, the exchange rate was 4 ounces of silver to 1 ounce of gold, and in ancient Egypt silver had the same value as gold.”

[7] According to the World Gold Council, there was approximately 190,000 tonnes of above ground physical gold at the end of 2017 – See following link: . Given that approximately 2,500 to 3,000 tonnes is mined each year, this article has assumed conservatively that the above ground supply of physical gold is approximately 195,000 tonnes by the end of 2019 or 6.87 billion ounces.

[8] Data from the 2019 World Silver Survey published by the Silver Institute indicates that the above-ground tradeable supply of physical silver is 2.5 billion ounces. See p37 of the following link:

[9] Note that these analysts also point to significant distortions in the gold market however they suggest that these distortions are not as extreme as the distortions in the silver market.

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