Some would say that the gold to silver price ratio is meaningless.
Others debate whether it will revert back to historic values maintained at a level mandated by law or policy, or if it will be based on actual above and below ground supply. Above ground investment grade silver is reversed, with five times more gold, while estimates indicate that nine times more silver than gold remains to be mined.
Yet where does the actual gold/silver ratio matter the most? Perhaps a look at price discovery at the margin in the jewelry markets would be illuminating since price and perception of value are always at play.
Another Look at Price and the Sticker Shock Effect
In the mind of the mainstream media, gold is expensive, even though it may be a relative bargain on an inflation adjusted basis or given the questionable value of paper money.
Few people would think twice before placing a $5 item in their shopping cart, but almost everyone would question their buying habits at a $10,000 price point.
As prices rise higher, consumers and investors tend to seek out alternatives, even if the higher priced item is still a relative bargain. From the perspective of consumption, but not investment, the price of an ounce of gold seems high to most people.
Furthermore, as gold prices head higher, jewelers have been moving towards selling lighter pieces with less gold and more silver content in an effort to reduce the "sticker shock" effect on their customers.
Gold's Price Relative to Silver's
Based solely on changes in metals prices, a $100 bracelet bought in the year 2000 would cost more than $600 today. At prices in between those two price points of $100 and $600, plenty of jewelry buyers have had second thoughts about their prospective purchases.
To continue to attract shoppers and keep demand at acceptable levels, jewelers typically lower the karat weight of gold and increase the amount of silver in the pieces they offer.
For example, a 22k gold band made of gold and silver is just as yellow but is nearly 10% less expensive than a 24k band. To a shopper, the difference between a 22k and 24k ring is typically insignificant, but to silver investors, this difference is huge.
After the fall of bimetallism and the disappearance of commodity backed paper currencies, the gold and silver ratio lost some of its former stability. Largely due to the world-wide depletion of government silver stockpiles, the ratio that was previously constrained by law became considerably more volatile,.
Recently, the gold/silver ratio has once again approached record highs since the price of silver has been depressed much further than the price of gold since April 2011.
Confirming the Gold to Silver Ratio
The retail jewelry marketplace demonstrates that the gold to silver ratio still has some fundamental backing outside of its former legally-defined levels.
Basically, when gold gets too expensive relative to silver, jewelers simply add more silver to reduce the per-item price and mitigate the resulting sticker shock to consumers. As the market for gold jewelry has cooled off since 2005, silver is quickly taking gold's place as a jewelry metal.
Should the economy rebound fully to its 2007 boom levels, an accompanying surge in consumer jewelry purchases will increase demand for silver to fill the gap in affordability left by the sky-high price of gold.
Furthermore, with silver production routinely running under the level of gold production, any change in consumer preference from gold to silver will be multiplied by the differences in available metal stock and production supplies.
With the tide turning in the jewelry market, silver investors can expect not just higher silver prices, but higher gold prices as well.
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