Bottom line, if you’re a speculator in precious metals, now may be a good time to consider trading in some gold for silver.
Over 4,000 years ago during Sargon the Great’s reign of the Akkadian Empire, it took 8 units of silver to buy one unit of gold.
This was a time long before coins. It would be thousands of years before the Lydians in modern day Turkey would invent gold coins as a form of money.
Back in the Akkadian Empire, gold and silver were still used as a medium of exchange.
But the prices of goods and services were based on the weight of metal, and typically denominated in a unit called a ‘shekel’, about 8.33 grams.
For example, you could have bought 100 quarts of grain in ancient Mesopotamia for about 2 shekels of silver, a weight close to half an ounce in our modern units.
Both gold and silver were used in trade. And at the time the ‘exchange rate’ between the two metals was fixed at 8:1.
Throughout ancient times, the gold/silver ratio kept pretty close to that figure.
During the time of Hamurabbi in ancient Babylon, the ratio was roughly 6:1.
In ancient Egypt, it varied wildly, from 13:1 all the way to 2:1.
In Rome, around 12:1 (though Roman emperors routinely manipulated the ratio to suit their needs).
In the United States, the ratio between silver and gold was fixed at 15:1 in 1792. And throughout the 20th century it averaged about 50:1.
But given that gold is still traditionally seen as a safe haven, the ratio tends to rise dramatically in times of crisis, panic, and economic slowdown.
Just prior to World War II as Hitler rolled into Poland, the gold/silver ratio hit 98:1.
In January 1991 as the first Gulf War kicked off, the ratio once again reached 100:1, twice its normal level.
In nearly every single major recession and panic of the last century, there was a sharp rise in the gold/silver ratio.
The crash of 1987. The Dot-Com bust in the late 1990s. The 2008 financial crisis.
These panics invariably led to a gold/silver ratio in the 70s or higher.
In 2008, in fact, the gold/silver ratio surged from below 50 to a high of roughly 84 in just two months.
We’re seeing another major increase once again. Right now as I write this, the gold/silver ratio is 81.7, nearly as high as the peak of the 2008 financial crisis.
This isn’t normal.
In modern history, the gold/silver ratio has only been this high three other times, all periods of extreme turmoil—the 2008 crisis, Gulf War, and World War II.
This suggests that something is seriously wrong. Or at least that people perceive something is seriously wrong.
There are so many macroeconomic and financial indicators suggesting that a recession is looming, if not an all-out crisis.
In the US, manufacturing data show that the country is already in recession (more on this soon).
Default rates are rising; corporate defaults in the US are actually higher now than when Lehman Brothers went bankrupt back in 2008.
These defaults have put a ton of pressure on banks, whose stock prices are tanking worldwide as they scramble to reinforce their balance sheets against losses.
I just had a meeting with a commercial banker here in Sydney who told me that Australian regulators are forcing the bank to increase its already plentiful capital reserves by over 40% within the next several months.
This is an astonishing (and almost impossible) order.
The regulators wouldn’t be doing that if they weren’t getting ready for a major storm. So even the financial establishment is planning for the worst.
Good times never last forever, especially with governments and central banks engineering artificial prosperity by going into debt and printing money.
These tactics destroy a financial system. And the cracks are visibly expanding.
So while the gold/silver ratio isn’t any kind of smoking gun, it is an obvious symptom alongside many, many others.
Now, the ratio may certainly go even higher in the event of a major banking or financial crisis. We may see it touch 100 again.
But it is reasonable to expect that someday the gold/silver ratio will eventually fall to more ‘normal’ levels.
In other words, today you can trade 1 ounce of gold for 80 ounces of silver.
But perhaps, say, over the next two years the gold/silver ratio returns to a more historic norm of 55. (Remember, it was as low as 30 in 2011)
This means that in the future you’ll be able to trade the 80 ounces of silver you acquired today for 1.45 ounces of gold.
The final result is that, in gold terms, you earn a 45% “profit”. Essentially you end up with 45% more gold than you started with today.
So bottom line, if you’re a speculator in precious metals, now may be a good time to consider trading in some gold for silver.