Gold to Silver Ratio, Natural

Consider the gold to silver ratio. We will denote this by G/S. This is just the ratio of the spot price of gold to the spot price of silver at a point in time.

It is often argued that G/S = 12 is "natural" (compare to the "man-made" ratio of G/S = 16). It is considered natural because it is the ratio of gold to silver that one encounters in the Earth's crust.

Therefore, one can value silver at G/12. Using the spot price of gold at the time of writing, we get $1,872/12 = $156 / troy oz for a silver valuation.

Note that this assumes the value of gold is constant. However, what if we assume the value of silver is constant? This would give a valuation for gold of 12*S, or 12*$28.45 = $341.40 / troy oz gold.

Note, however, that we believe an increase in the price of silver is more likely in the long run (but who knows in the short run) than a decrease in the price of gold.

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