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The Mining Ratio is Not the Gold:Silver Ratio

First, the definitions, if you need them. The "mining ratio" is the number of ounces of silver mined for every ounce of gold mined. Today, that ratio is somewhere around 8:1 (roughly 800,000,000 ounces of silver mined annually compared to roughly 96,000,000 ounces of gold). The "gold:silver ratio" is how many ounces of silver an ounce of gold can buy, determined by taking the price of gold and dividing by the price of silver. As I write this, that ratio is roughly 80:1 (about $1,300 for gold and $16.25 for silver), meaning that you can buy about 80 ounces of silver for an ounce of gold. Finally, there is also the "Earth's crust ratio" (how many ounces of silver are estimated to be in the Earth for every ounce of gold), which is roughly 20:1 (based on silver being .075ppm and gold being .004ppm), but some sources show it as high as about 65:1. Note that ratios can be backwards (e.g. gold:silver should be 1:80, but is usually written 80:1).

Many, many, many people (even sophisticated bloggers) are completely misunderstand the mining ratio and what it means (and worse, they don't realize it). The same holds true with the Earth's crust ratio. The confusion is that they assume that the gold:silver ratio should naturally be the same as the mining ratio -- but this is completely wrong.

The amounts of gold and silver mined and in the Earth's crust have nothing to do with what the gold:silver ratio should be.

What should the gold:silver ratio be? It all depends on how people value the two metals. If concern of inflation (a main factor for gold demand) is low, industrial demand for silver may dictate the gold:silver ratio. If concern of inflation is high, the level of concern may dictate the gold:silver ratio (although investment demand for silver would increase along with gold, lessening the effect).

People who misunderstand the mining ratio assume that if suddenly miners could only get half as much silver out of the ground, the price of silver would double (and if they mine twice as much, the price of silver should go down by half). They fail to completely understand demand. If, for example, industrial demand accounts for 90% of the silver mined (so that of 800Moz of silver, 720Moz goes to industry), then if silver production plummets, the price of silver could skyrocket (manufacturers of solar panels that use silver need that silver). Likewise, if silver production were to double, industrial usage would likely remain the same (on increase over time, if the lower prices lured them to use more silver). Investors would then get stuck with about 10 times as much silver, which could cause the price of silver to go down dramatically.

For simple anecdotal evidence, much less platinum is mined annually than gold, yet the price of platinum is currently less than gold, and often has.

And for simple logic, compare silver and copper. According to the "mining ratio" fallacy, copper trades at about $2.50/lb, or about $.14 per troy ounce. At roughly 800:1 mining and Earth's crust ratios, silver should sell for about $112/oz. And similarly, about the same amount of cadmium is mined each year as silver -- so according to the "mining ratio" fallacy, silver should trade at about the same price as cadmium (about $.05 per troy ounce). Does that mean that cadmium is an incredible bargain? No. It just means that if people have a choice between cadmium or silver, they would much prefer silver (e.g. due to its physical properties, and potential as money).

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