Proponents of silver and their expectations for a much higher price have talked for years about the reasons “silver is undervalued” (their words, not mine).
Whether it is a deficit in new production of silver or the gold-to-silver ratio, there is always something to talk about; so let’s talk.
Below is a chart (source) of silver prices for the past century…
The chart is plotted using average closing prices for spot silver so the peak shown in 1980 is $36 oz., which is an average of closing prices for the month of February 1980. The peak intraday price was $49 oz. in January 1980.
In either case, with spot silver currently under $28 oz., silver is definitely cheaper than it was in early 1980.
That does not, however, make silver a bargain at its current price. The actual average price for the entire year 1980 was $20.98 oz. With the average closing price for 2021 at more than $26 oz., then silver is more costly by an average of $5 oz., or twenty-four percent.
The two parallel lines identify a price zone for silver between $20 – $40 oz. The total time that silver prices were actually within that range or higher amounts to less than five years.
Since the chart includes a total of 106 years, that means silver has traded at prices below $20 oz. for more than ninety-five percent of the past century.
Conversely, we might say that silver at $27 oz. is not cheap. In fact, after adding the exorbitant premiums that accompany the purchase of physical silver (Silver Eagles, junk silver coins, etc.), silver is quite expensive; more than almost any other time shown on the chart.
However, a realistic assessment of silver prices is not complete unless we consider inflation-adjusted prices. Here is the same chart as above, but with silver prices adjusted for inflation…
In the chart above, the same parallel lines of $20 and $40 are shown. On an inflation-adjusted basis, most of the price history for silver is still under $20 oz.
An imaginary line at $30 oz. compares more closely to the $20 oz. in the first chart and reinforces how significant the recent $30 oz. stopping point is in silver’s price history.
Even on an inflation-adjusted basis, silver is still more expensive than almost any other time in the past one hundred years. After adding premiums for actual physical silver in various forms, the acquisition price approaches $35-40 oz.
Some will argue that expectant price increases for silver will make any of this type of analysis unnecessary, or moot. However, the reasoning behind those expectations are more grounded in fantasy than actual fundamental fact.
One of the so-called fundamentals that seem to attract unwarranted attention is the supply-demand gap in production (mining) of silver relative to consumption.
“The gap in consumption over production that existed in the late sixties and early seventies was one of several things that contributed to much higher silver prices. But when all is said and done, and after decades of ‘fundamental’ arguments about such an imbalance, silver has failed to show any further signs of a need for revaluation in price because of consumption/production gaps, past or current.” (see No Silver Lining Here)
Another favorite argument trumpeted in silver’s behalf is the reliance on a return to gold-to-silver ratio of 16:1. The ratio currently stands at 67 and was as high as 120 last year. Below is a chart of the ratio…
Silver investors who are depending on a declining gold-to-silver ratio are betting that silver will outperform gold going forward. But, if anything, the chart (see link above) shows just the opposite. For more than fifty years, the ratio has held stubbornly above a rising trend line taking it to much higher levels.
In the Mint Act of 1792, the U.S. government arbitrarily chose a 16:1 ratio of gold prices to silver prices. The actual prices were set at $20.67 per ounce for gold and $1.29 per ounce for silver.
“There is no fundamental reason which justifies any particular ratio between gold and silver.” (see Gold-Silver Ratio: Debunking The Myth and Gold-Silver Ratio And Correlation)
What you do depends on your reasons for owning silver.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner.