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What’s special about 16 to 1?

Gold traded over $1,500 a troy ounce yesterday and is doing so again this morning.

There is something compelling about a nice round number. It makes calculating in your head much easier. Markets often seem drawn to them.
Silver is not yet at a nice round figure at $44.77, but naturally the mind wants to round it up to $50.

Another round number that collectors are drawn to is the historical 16 ounces of silver to 1 ounce of gold ratio that was established by Treasury Secretary Alexander Hamilton in 1792 when the Mint was founded.

There is some danger that this figure is treated as some sort of revealed historical truth. It isn’t.

It was simply the result of an analysis performed by Hamilton of the relative values of silver and gold that then prevailed in the marketplace.

It was a fluctuating number and that caused all sorts of problems in the early years of the Mint.

He in fact got it a bit wrong. It was really 15.75 to 1 when he made his calculations. Because silver was undervalued, the new U.S. silver coins tended to be shipped abroad to be melted. The silver dollar coinage was suspended after the 1803 coinage.

By the 1830s the gold in U.S. coins was undervalued. An ounce in U.S. gold coins was worth roughly 17 ounces of silver on the open market but it could only buy 16 ounces if simply exchanged for U.S. coins, so U.S. gold coins were shipped abroad to be melted.

These numbers don’t sound like much, but the early United States was condemned to constant coin shortages because of this ongoing melting of one set of coins or the other.

When gold was discovered in California in 1848, silver once again appreciated in value.

When the Comstock Lode started producing huge quantities of silver just before the Civil War, gold once again appreciated.

Silver in fact became so common in the 1870s that forced production of Morgan silver dollars could not use up the available supply.

Germany went off its silver standard in 1873 for gold. The U.S. officially followed in 1900 when it adopted the gold standard.

In 1933 silver was about 143 to 1 in the depths of the Depression.

So what is the true ratio?

The answer is whatever the market says it is on the day you ask the question.

Today the ratio is 33.5 to 1. Could the market say 16 to 1 again?

It is possible that the markets could return to the old ratio. It reached 17 to 1 in 1980 at the top of that market. However, what the market decrees one day can change the next. That’s been the history since Hamilton tried to set the ratio.

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4 Responses to What’s special about 16 to 1?

  1. Tom Snyder says:

    I read somewhere that the 16 to 1 ratio was about correct for 1792, but with Comstock, Mexico, Colorado, Idaho and other mines coming on line since, the correct ratio for the metals existence is now about 40 to 1. This would make silver currently a bit over priced which could easily be caused by both speculative demand and dollar depreciation. I saw speculators lose their shirts in one day on January 22, 1980. This is now a new generation of gamblers.

  2. Kevin Dickey says:

    Eric Sprott: "Expect The Gold To Silver Ratio To Hit Single Digits". I like Eric’s number better. 40:1 is incorrect. See:
    http://www.zerohedge.com/article/eric-sprott-expect-gold-silver-ratio-hit-single-digits

  3. Tom Snyder says:

    "New Generation of Gamblers". See Kevin Dickey’s comment above. Remember silver and gold just sit there like knick knacks. It’s
    convincing people to keep buying in at ever increasing levels, not
    the physical value of the product. Eventually their funds will get tapped out. Remember houses? In some areas you can’t get people to buy in at half their former price.

  4. Tom Snyder says:

    Ahem! Here it is Cinco de Mayo and silver is back to 42 to 1.
    That makes it a little bit under priced in my book but may become an even better bargain shortly. Kevin, so soory to hear about your loss.

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