Are Silver Prices Lagging Gold, Or is Gold Just Way Over Priced?

One of the reasons silver prices are expected to rise dramatically is because of the historical ratio between gold and silver prices; the historical ratio is 20 to 1 (20:1). Gold has taken off in price rising from just over $200 per ounce in 2001 to over $1,240 per ounce in August 2010, but even though silver is rising in price, it is still only approximately $18 per ounce. Based on the 20:1 historical ratio, silver prices should be $62 per ounce right now.

But what if this discrepancy is not that silver prices are lagging behind gold prices, but rather, gold is simply way over-priced?

After all, the fair market price of gold should be only around $600 per ounce based on the growth of the Consumer Price Index (CPI). Gold prices are currently high (and rising), because of low interest rates, high economic uncertainty around the world, and expected rising inflation.

If all the “bad” economic factors went away, would gold prices fall revealing that silver is in fact fairly valued?

The answer is “yes” and “no”. Yes, gold prices would (and likely will) fall; and “No”, silver is not fairly valued at today’s prices.

The reason is the historical ratio is just one symptom of a historically-controlled silver market; the prices have been kept low by Governments around the world releasing their inventories to supply industrial applications and growth. Silver has thousands of commercial uses that actually consume (i.e., “use up”) silver, and since inventories are now essentially nonexistent, silver has a “strictly limited” supply.

Contrarily, gold only has a handful of really practical uses, and none of the applications for gold actually “consume” it. All the gold ever mined and used is still around. And though goldmines are choosing not to extract gold from the mines as fast as they could (which artificially limits supply further driving gold prices upward), the gold supply is still growing. This is absolutely not the case for silver as explained in many of my other articles about silver. In fact, it doesn’t matter what the historical ratio is between gold and silver prices.

Eventually, the strictly limited supply is going to drive silver prices well beyond the price of gold regardless of how high gold prices rise. It’s simply a matter of basic economics; we have thousands of important applications for silver (i.e., high demand) and a strictly limited supply which means our inventories are gone, and there is precious little left in the ground (according to the U.S. Geological Survey).

Thus, you will see silver prices extend well beyond the price of gold (regardless of how high or low gold prices go) once industry gets to the point where they can no longer get the amount of silver they need. You will also see gold prices fall once the worldwide economy begins to settle down and then resume an upward trend… as long as inflation doesn’t grow dramatically.

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