In Ted Butler's Archive

The Real Gold/Silver Ratio

Part II


Theodore Butler

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

I’d like to continue on a theme I wrote about last week, namely, attempting to uncover the true relative value of silver compared to gold. You see, I am convinced that the most widely used yardstick, dividing the price of gold by the price of silver, may be inadequate and even misleading. I don’t believe that enough information is provided by price alone. It’s kind of like trying to determine the weather by temperature alone – 72 degrees Fahrenheit sounds pleasant, but not if you’re in the grip of a hurricane.

Therefore, one should apply as many data points as possible to determine the truest condition of anything. That was why I started to analyze the relative value of silver compared to gold by the market capitalization method, using both price and the actual amount of each metal in existence, instead of just price alone. It’s more objective and scientific that way. For instance, just because one company’s stock price may be higher than another’s doesn’t mean the company itself is worth more – you have to compare total shares outstanding as well.

After I wrote the first article, I realized that I could have provided many more data points to aid both the reader and myself to understand the real gold/silver ratio. While I found it certainly amazing that the gold metal market capitalization was 200 times larger than silver’s, I provided no reference scale to allow anyone to measure just how amazing that difference was. Fortunately, the data needed to construct such a reference scale is relatively easy to obtain.

What I set out to do was to determine how the differences in the current market caps for both gold and silver compared historically. Was the current market cap difference large or small when compared over the last 100 years? After all, the widely used price-only ratio was stuck somewhat in the middle, at 50 or so, of the 100-year trading range of roughly 15 to 100. Would the market cap ratio parallel the pattern of the price only ratio?

The short answer is that the results astounded me, as I think they will astound you. I must confess – it takes something very special to make me feel I have underestimated just how bullish silver really is. This study has had that effect on me.

Before I present the data in the following tables, let me explain my methodology and reference my sources. I’ve relied principally on data from the World Gold Council, the US Geological Survey and the Silver Institute. Since the data over the past 30 years is unquestionably more accurate than data from 100 years ago, I have worked backwards, from current world above ground amounts for gold and silver, to get to historical amounts.

Admittedly, gold above ground amounts are easier to pinpoint than silver amounts. That’s partly because gold is still held and recorded by world governments, but also because gold is so valuable that virtually none of it is ever destroyed by non-recoverable industrial consumption. Therefore, every ounce of gold that is mined annually is added to above ground total amounts.

Silver, of course, is different from gold in that it is industrially consumed. In fact, for more than 60 years, more silver has been consumed than has been mined annually, even allowing for recycling. Existing inventories were drawn down to balance the structural production deficit. Therefore, we know there is a lot less silver in existence than 30 or 60 years ago. The highest estimate for existing silver bullion equivalent (bullion plus “junk ” coin) is one billion ounces, with most estimates falling in the mid hundred million-ounce range. I will use the billion-ounce amount to be conservative.

I think there are billions of ounces of silver in non-bullion equivalent form (silverware, artifacts, jewelry, etc.), but no one knows at what price, if any, that silver could enter the market. Certainly, there has been remarkably little of such silver released to the market to date, in spite of previous predictions of a flood of such silver starting at $7 or higher. If such silver does come to market in the future at much higher prices, and that silver is not absorbed by other investment or industrial buying, that circumstance will have to be factored into the silver supply/demand equation. The great thing is that such an event cannot go unnoticed and we will all stay alert to its possible coming. At the very least, it is not a factor now. To conclude that silver is not a good investment at current prices, strictly because more supply may come to market at higher prices is patently absurd.

According to the World Gold Council (WGC) we have a gold above ground stock of 5 billion ounces This is higher than the 4 billion ounce figure I stated last week, so I am revising my current market cap comparison to gold being 250 times larger than silver. I’ve rounded all the numbers to provide for easier comparisons.


Gold Market Cap

Silver Market Cap

Ratio (Price)

Ratio (Market Cap)

1900 $20 Billion(1 billion oz x $20) $8 Billion(12 billion oz x 65 cents) 30 2.5
1950 $70 Billion(2 billion oz x $35) $8 Billion(10 billion oz x 80 cents) 44 9
1975 $450 Billion(3 billion oz x $150) $20 Billion(5 billion oz x $4) 38 23
2006 $3 Trillion(5 billion oz x $600 $12 Billion(1 billion oz x $12) 50 250


I would like to make a couple of observations about the data displayed above, before introducing another table. I will follow all the data presented with overall conclusions. The data above point out the fallacy of comparing by price alone. Over the course of more than 100 years, the fluctuation in the old price-only ratio was not unusual, from 30 in 1900, to 44 in 1950, to 38 in 1975, to 50 presently. Nothing to get excited about there. But by looking at the temperature only to gauge the weather, you would never know if the wind was blowing 150 miles per hour. Likewise, the gold/silver price ratio is an inadequate measurement. By comparing with a market capitalization ratio, we can indeed confirm that a Cat 5 is howling through the relationship between gold and silver.

While the conventional price-only comparison has changed little, the market cap ratio has increased dramatically by 100 fold over the course of 106 years. The numbers speak for themselves – silver is 100 times more undervalued to gold than it was 106 years ago. Period.

Additionally, the data clearly indicates that the market cap for gold has increased dramatically on an absolute basis over the past 106 years, from $20 billion to $3000 billion ($3 trillion), or 150 times, due to increased prices and growing inventory. While gold is said to be a small market, there are not many specific assets that command a $3 trillion market cap. Trillion is a very big number.

Silver over the same period only increased in market cap by 1.5 times, in spite of an increase in price, due to the draw down of inventory by more than 90%. Because we are comparing metal with metal, there is no currency or inflation adjustment necessary. This is a true apples to apples comparison.

The next table compares some of the data above and includes world population and the per capita dollar amounts of gold and silver (rounded to nearest dollar).



World Population (billions)

Gold Market Cap (billions)

Silver Market Cap (billions)

Gold Per Capita

Silver Per Capita


























What this table tells us is that, on a per capita dollar basis, the world’s citizens have never owned more gold or less silver than they do today. The world’s citizens own more than 35 times more in gold, expressed in dollars, than they owned 106 years ago. Yet at the same time, the world’s citizens own less than 40% of dollar-denominated silver than they did 106 years ago. Once again, these figures should shock you, just as they shocked me. And please remember, this is also an apples to apples comparison.

Strictly on a simple arithmetic calculation, the following examples indicate what the price of silver would be today if it had maintained its parity with gold on two different measurements. One, if the silver market cap had equaled the growth in the gold market cap from 1900, and remained valued at 40% of the gold market cap (as it was in 1900), the current price of silver would be $1000 an ounce ($1200 billion divided by 1 billion ounces.)

Two, if the per capita amount of silver in 1900 grew at the equivalent rate that the gold per capita grew, the current price of silver would be $175 an ounce (35 times the amount they held in 1900.) I’m sure if you play with the numbers, you’ll come up with other price points for silver. All much higher than current prices.

Are these my price targets for silver? Not necessarily, but only because they seem so outlandish when compared to the current price of $12. That’s because I am human and the human mind is restricted by the influence of price patterns known and observed in one’s lifetime. After all, we are all bound by our own life’s experiences.

But I can tell you that the data is accurate and I have tried to be objective in its presentation. $1000 silver seems crazy, but less crazy than gold having a market cap 250 times silver. I don’t think anything could be crazier than silver being at its most undervalued ever relative to gold, at precisely the time that silver inventories are approaching extinction. As always, it’s up to you to take the data and form your own conclusions.

I want to be very clear in what I am concluding. I am not saying that gold is overvalued, or that gold can’t or won’t go up in price. I am on record as having recently depicted the gold market as bottoming out, with little risk and decent, if unknown, upside, based upon the COTs. I am not expecting or rooting for gold to go down in price. Gold going up in price is good for silver. I am not a gold bug, but nor am I an enemy of gold. I was the very first to publicly expose the fraud and manipulation of gold leasing/forward selling, the termination of which has been the principal factor in the doubling of the gold price.

Some might suggest that the great value disparity between gold and silver points to the realization of the superiority of gold as the one true money. Perhaps. But why is this disparity showing up only against silver? Gold compared to the other precious metals (platinum, palladium, rhodium, iridium), the base metals, oil, broad commodity indices, real estate or the stock market, does not suggest a gold overvaluation. As I said, this is severe silver under valuation, not a gold over valuation.

While I was somewhat surprised by the high per capita dollar amount of gold, I was more surprised with the low per capita dollar amount of silver. That the world only owns less than $2 worth of silver amazes me. The real story here is the under ownership of silver. It is that real story that promises an investment bonanza. Certainly, such a piddling amount of per capita silver does not suggest wholesale liquidation.

Please keep in mind that due to its very nature, the market cap of gold is most likely to continue to grow, certainly because the amount of gold above ground must continue to grow, but also perhaps because of further price increases. In 25 years, at current mine production rates, another 2 billion ounces of gold will be added to total above ground amounts, to a total of 7 billion ounces. We also know that world population is expected to grow by 1.7 billion souls, to 8.2 billion, in 2030.

In silver, I doubt the physical inventory will grow much, but neither can it fall at the rates it has fallen over the past 50 years. After all, we have fallen by 10 billion ounces in bullion equivalent inventories since World War II, to the current 1 billion ounces. Since there is no such thing as negative inventory, we can only fall to somewhere between current levels and zero. The point here is that the deficits must end at some point, certainly long before 2030. Not to be repetitive, but the only way the mandatory end to the deficit pattern can be achieved is by price rationing caused by shockingly high prices.

A few other points. It should be obvious that there has to have been a great force, or explanation, in existence to account for this unbelievable distortion in the value relationship between gold and silver, two items whose history dates back thousands of years. While not the subject of this article, that force or explanation is the silver manipulation, from government acquisition and disposal of silver, to the Silver Users Association, to leasing and the current paper short selling by big concentrated COMEX interests. The current value distortion between gold and silver did not come about through free market forces or happenstance.

As much as the above data suggests a massive correction in silver’s current under valuation to gold, it is not just history alone and common sense that will dictate the price correction. While the data in the tables does strongly suggest that silver inventories are headed clearly towards zero and a shortage condition, it is not possible for the data to imply just what an industrial shortage of silver would mean for the price of silver on an absolute basis or relative to gold.

When comparing the true value of gold and silver in price, it is important to always be aware of the true nature of each metal. Silver is an industrial metal, first and foremost, and an investment metal second. Gold is not an industrial metal, but solely an investment metal, sought for its value and beauty. Only industrial metals can go into shortage. Gold can go to any price you imagine, but not on the basis of an industrial shortage. Silver not only can go into an industrial shortage, but as the data above clearly indicates, it will go into an industrial shortage at some point, due to disappearing inventories.

To appreciate the eventual and inevitable impact of an actual shortage on the price of silver, one has to rely upon human imagination and prior experience with other shortages. This is the stuff that, quite literally, causes me to shudder when I contemplate how high the price could go. In a true shortage, sellers freeze up and are afraid to sell at almost any price, while buyers emotionally panic into bidding at irrational prices. Short time durations, but extreme price movements characterize such emotional periods. This condition is coming to silver.

I think I know certain things for sure. I know that one-half of one percent is a very small percentage. One-half of one percent of the gold market capitalization is $15 billion. While $15 billion is a relatively small number in the gold market, it is a very large number for the silver market. Fifteen billion dollars is more than the entire global silver market capitalization. Because there is so much less silver than gold, and because the price of silver is so low compared to gold, a $15 billion switch from gold into silver would send the silver market flying and break the backs of the manipulators. In turn, the resultant price rise in silver would probably fuel a further price rise in gold. Remember, I am talking about a one-half of one percent switch out of gold into silver.

I also know that very few people in the world appreciate the extreme under valuation in silver compared to gold, especially on an historic basis over the past 100 years. How could they? While I admit to being overly pre-occupied with silver (a nice way of saying silver nut), even I didn’t fully comprehend it, until I sat down and did the calculations. In my opinion, it is the lack of awareness of this data that prevents people from rushing to take advantage of a truly incredible investment opportunity. But now you are aware of it, and I challenge you to disprove it or act on it.

Why do I keep harping on folks to sell gold and buy silver, even though I don’t expect or want gold to go down? It’s simple – the data. It’s like the classic answer the famous bank robber, Willie Sutton, gave when asked why he robbed banks. “It’s where the money is.” There’s $3 trillion in gold and only $12 billion in silver. If you have cash, buy silver. If you have only gold but no cash, sell gold in order to buy silver. Obviously, a lot of people own gold – $3 trillion worth. The potential audience is large and still mostly unaware.

This is not an invitation or suggestion that anyone trade the gold/silver ratio on a leveraged basis. Too many bad things have and can happen when one is leveraged in the most manipulated market of them all. This is a call to rebalance fully paid for gold and silver holdings. After all, gold holders, by virtue of the doubling of the gold price over the past few years, are in the fortunate position to be able to take advantage of their gold buying power. This is a switch that not only should be done, it can be done.

A switch from gold to silver would seem to satisfy the most important requirement in any investment decision, namely, the reduction of risk. Due to silver’s dramatic under valuation relative to gold (and just about everything else in the investment world); the risk of loss in silver relative to gold (or anything else) appears very limited. That’s some potent combination – low risk and high reward.

In summary, the data above leads me to the certain conclusion that silver must rise dramatically in price on an absolute basis and rise dramatically in price relative to gold. Everyone has to make up their own mind on what to do with their own money, so I’ll speak for myself. I have many gold friends who claim to be fully represented in silver because they have one or five or ten ounces of silver for every ounce of gold they own. I think they are missing the boat and are kidding themselves.

If you want to own all silver and no gold, I can whole-heartedly and enthusiastically agree with that. If you have to own gold and silver, it should be at least in equal total dollar amounts, namely 50 ounces of silver for every ounce of gold. If that requires you to reduce your gold holdings, I believe that will only be temporary. Later, you’ll be able to buy more gold with your silver profits. If you insist on owning all gold and no silver, even after fully considering the above data, good luck to you. Just don’t say that you weren’t aware of the data.

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