Gold to Silver Ratio, a WIDER Perspective
f you are familiar with the Gold to Silver ratio (XAUXAG) it shows us how many ounces of Silver is required for 1 ounce of Gold . So currently, it takes 85 ounces of Silver for 1 ounce of Gold .
Gold and Silver have been monetary metals for centuries, and historically, the Gold and Silver ratio has been 14-16:1.
Silver lost most of its monetary standing due to its stock to flow ratio…meaning the higher the price of Silver went, the more Silver would be mined to meet the new demand increasing its stock.
gold is the best form of money because it has a high stock to flow ratio. Meaning that if Gold moves up 100% or 1000%, the flow of Gold mined per year will not change because it is rare and hard to mine. It will always be around 2% new flow per year regardless of the price move.
Other metals like Copper , and Silver to some extent had low stock to flow ratios because as their prices rose, a lot of new capital and resources was focused on mining Copper and Silver and as mentioned, this would increase the flow and then bring price back down with this new supply.
We can argue though that this environment is different for two reason:
1) A lot of miners have not spent money on exploration. They are running low on their reserves and will need new supply. Mining is a business with a lot of costs that cut margin. So many argue that if Silver price does increase, new capital and resources allocated to mine silver will lag due to the fact that new resources will have to be developed.
2) This goes closely to my work on yield and Gold being a confidence crisis metal. I have argues stocks will go higher because there is nowhere to go for yield. Large funds cannot be in cash for a long time. When stocks begin to fall and we go to a risk off environment, this money will have to go somewhere. Some say bonds, but as Ray Dalio has said, it does not really make sense to hold bonds. You really are looking to sell them off to a bigger fool.
Enter Gold and Silver . There will be a confidence crisis as I have mentioned. People will realize soon that central banks are out of options. Central banks are not using the term QE , because it would illicit a confidence crisis. People will realize that monetary policy never worked and we are in a QE forever and 0 interest rate environment forever.
Paul Tudor Jones, Sam Zell, Ray Dalio and Stanley Druckenmiller are some Billionaires who have advocated increasing one’s Gold position in their portfolio from 10% to higher. Paul Tudor Jones saying Gold will be the best performing currency in the next 12-24 months, and Ray Dalio perhaps starting a move into Gold by large funds and institutions. Dalio is well respected by the hedge fund community, and when he talked about Gold a few months ago, a lot of these funds began opening positions into Gold and miners.
Silver will have a good move because it is linked with Gold as it is a monetary metal. Gold is about a 7 Trillion dollar market. Silver is less than 700 Billion. It is a tiny market. When money moves into Gold , it will inevitably run into Silver as well. It will be seen as cheap. Silver will move much higher and faster due to the market being so tiny that large amounts of money will have a huge impact .
I have talked about the Gold and Silver ratio hitting all time record highs past 92 a few months ago.
This weekly chart for me is very exciting as I am seeing a potential head and shoulders reversal pattern which is alluding to a large move in Silver .
This seems to coincide nicely with central banks. I believe the Fed WILL cut again in December so in a few weeks. When this occurs, the market will begin to understand that we are going to 0 percent interest rates.
So again folks, do not be moved by these moves in precious metals on a daily basis. On a long term basis, Gold and Silver will do well.
Remember, when this confidence crisis occurs, we will see Gold and the US Dollar move up TOGETHER!
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