Many “silverbugs” out there use a common price ratio between silver and gold to predict silver’s future price. Here’s why you shouldn’t only use that…

Think about shares of a company. A single share of Company ABC could be $2 per share, but that doesn’t mean that company is only a $2 company. If Company ABC has 100 million shares outstanding, that would make it worth $200 million. That’s its market value. And that is exactly how you should look at precious metals.

We’re talking about the market’s value for all the gold and silver in the world. According to Theodore Butler, contributor to SilverSeek.com, that number is quite telling.

In 1900, there were one billion ounces of gold in the world, and gold had a $20 per ounce price tag. That made gold’s market value $20 billion. There were 12 billion ounces of silver in the world with a price tag of 65 cents. That gave silver a market value of $7.8 billion. It led to a ratio of only 2.6.

Today, gold’s market value is $3 trillion, and silver’s is only $12 billion. Here’s how Butler figured that out:

The amount of gold has gone up five-fold since 1900, yet the amount of silver decreased from 12 billion ounces to only one billion ounces, because silver has many industrial applications like electronics and batteries, while gold’s only use other than wealth storage is jewelry.

That mere fact makes this ratio so astronomical. While the price ratio has only shifted from 30 to 56 over the past 108 years, the real market value ratio has jumped from 2.6 to 281.

That means that silver’s price has been suppressed for far too long. The ratio doesn’t have to correct the whole way back to 2.6 for you to make money off of silver. Even a slight drop is big money in your pocket. You also don’t have to store a bunch of silver bars in your house to get rich off of this anomaly either.

One of the most effective ways to profit from a precious metals rally is leveraging the rise in price by investing in junior miners. We’ve talked about this before. During the last big rally in gold and silver, junior miners beat every other investment with gains of 2,464%, 3,987%, and even 13,025%. We may have a chance to see those kinds of gains this time around. And only penny stock miners can offer those types of gains. When we find one we’ll let you know…

Sincerely,
Jim Nelson
August 14, 2008

Invest Using the Gold Silver Market Ratio was originally featured in the Penny Sleuth.