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Typically, we only include one chart or two in our articles, but for this particular analysis, it was necessary to look at multiple year periods.  We hope you will forgive the number of charts, but we feel they are important to show the trend.

Recall that gold was fixed in price until 1971.  During the previous years, there had been double digit inflation and during the 1970s, both gold and silver exploded not only responding to the inflation of that decade, but like a coiled spring, some gains were no doubt to make up for years of price control during a period of currency debasement.

Starting in 1980, at the end of the first great bull market for the metals, silver has traded at 80:1 or higher on 6 occasions.  Note most are spike type tops that don’t last very long, while others like 1991-1993 built a more complex top.

gold-silver chart

It is also note worthy that extremes in the ratio get resolved in a few years by reverting to the average ratio around 60:1 or plunging into the 30 to 40 range in the more extreme cases.

Thus, we can look at silver in at least two ways.  When silver is this far out of step with gold, what has its price performance been relative to gold and what has its nominal price performance been?  In each case, we will look a silver performance for a 3-year period after each these 6 readings.

The charts below are instructive.  There is a lesson in each time period shown. The date in the upper left-hand corner is the ending date of the 3-year period. Silver is in red, and gold is shown in black.  The percentage return is noted during the entire period as well as dates in between. From 1991-1994 for example, at the end of the period silver was up just about 50% while gold was up 9.91%. Silver ran ahead of gold most of the time, except March of 1993 when both were negative about the same percent.

gold-silver chart

gold-silver chart

From 1995 to 1998, the two metals ran closely together, both declining but silver finished the period way ahead of gold.

gold-silver chart

gold-silver chart

gold-silver chart

gold-silver chart

Thus, if you look at all the periods starting when the ratio is above 80:1, only in the period just ending (February 2019) is silver behind gold, although you can see that at times (such as late summer 2016) silver ran way ahead of gold.

Even in bear market like 1996 to 1999, when metals were ignored and stocks were soaring into the tech bubble blow off, silver wound up better than gold.

We think if you examine the charts provided in some detail, the following conclusions seem justified:

When silver trades above 80:1 to gold, silver will provide substantial price differential to gold.  In most of the periods measured, silver was ahead of gold by a significant multiple sometime during that three-year period, and only in one case did it end behind gold.

Notice as well, that there are other instances when this was the case when the ratio was in the 70:1 range.  We picked 80:1 and a three-year period to measure just for the sake of illustrating a point.  We also are not suggesting anyone is smart enough to know in advance what date within the three-year period to trade.  We just wanted to show that there is ample room within each of these periods for a favorable trading opportunity, whether you are lucky enough to pick top tick or not.  It is even the case, with the last period as the exception, that silver did better if just held.

As suggested before, the metals are different.  We lean towards holding more gold because it is a monetary metal and today’s debts and deficits are a crisis of a monetary nature.

However, when the ratio is so stretched as it is at present, it may suggest a change in allocation between the two metals. Perhaps more silver should be added so its percentage representation in the portfolio is higher than it might be right now.  We are NOT suggesting all gold should be sold and converted to silver.

We are suggesting with the ratio above 80:1, silver appears undervalued and should perform relatively better than gold over the next few years.  This was even the case in the 1980s and 90s when neither metal did particularly well.

Both metals should be part of a diversified portfolio and if little no silver is present, this looks like a decent place to add.  At a ratio of 85:1, if history does not repeat (to borrow a phrase from Mark Twain), it should at least rhyme.

Charts courtesy of Stockcharts. Com. Sources are believed reliable but cannot be guaranteed.