While searching for data on historical prices of gold and silver I ran across an interesting article by Tim McMahon titled "Comparing Oil vs. Gold" . In it he presented the concept of looking at the price of a barrel of oil in ounces of gold, rather than the usual dollars per barrel. He also discussed some basic economic principles which I won’t bother repeating here. It struck me that this would be an excellent way to look at the relationship between gold and silver to determine which is “the better buy”.
Being the statistical junkie that I am, the first step was to verify that there’s a relationship between the prices of gold and silver over the long run. I started with 1981 because it was A) after the US government abandoned the gold standard and opened up the sale of gold to US citizens; B) the Hunt Brothers famously manipulated the silver markets in 1980, skewing the data; and C) it was more than 30 years ago. Not only is there a correlation between gold and silver prices (Figure 1) but the relationship is very strong at 89%, although less than the high 90’s that I’d expected.
Figure 1
This is not to say that the price of gold determines the price of silver. More likely it’s due to gold and silver prices (along with oil prices, the Consumer Price Index (CPI) and, I suspect, other commodities) responding in the same way to a variety of market and inflationary factors.
Figure 2
Figure 2 shows that an investment in gold or silver in 1981 would have lost value until 2005. A buy and hold strategy, which works so well in the stock market, doesn’t work with commodities. In fact, an investment in silver in 1981 would have yielded a total gain of 182.2% as of today; gold a total of 400.9%; while the CPI increased by 176.2%. Gold in particular, and silver, have been inflation beating investments for 42 years, but they both pale in comparison to the 2,983.9% increase of the S&P 500.
Figure 3
Over the past 42 years the price of gold, expressed in ounces of silver, has fluctuated between 41.1 (1982) and 92.1 (1990). As this is written on 10/26/2023 one ounce of gold is selling for 86.5 ounces of silver. The average price since 1981 has been 68.1 ounces of silver for one ounce of gold, and gold has been trending upward, relative to silver, since 2010.
Looking at a shorter time frame, since the year 2000 for instance, yields better results for gold and silver. Gold has increased 625.4% ($274.50 to $1,992.20); and silver has gone up 403.0% ($4.58 to $23.01). The graph in Figure 4 shows the relationship between the CPI and gold and silver prices, with gold and silver outperforming the CPI which has risen 76.5% (and the S&P 500 by 185.0%).
Figure 4
There are other reasons for putting money into gold and silver beyond the investment return, such as a hedge against hyper-inflation, collapse of the banking system, and portfolio diversification. So, if you’re investing in gold or silver, which is the better buy today? Silver, because the prices of gold and silver are so strongly linked, I believe that either gold is going to come down in price until it’s selling for the historical average of 68.1 ounces of silver, or the price of silver will go up to reach the same historical average. Considering the inflation rate of the past couple of years, common sense tells us that it’s more likely that the price of silver will rise, as opposed to the price of gold going down. Either way, silver should outperform gold over the next few years.
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