Precious Metals - Gold or Silver?

Prices

As the world economy continues to struggle along, more and more people have been turning to gold, as well as silver, as the last safe haven.  Fears of hyperinflation or rapid deterioration in global trade, or worse (social unrest/wars/etc) have led gold to reach levels unseen since the 1970's.

As both charts on the right demonstrate, both gold and silver reached their recent-history zeniths in the 1970's, when fears of inflation were rampant throughout the country (in addition to demonetization of hard currencies in favor of fiat currencies).
I suggest those interested to read about the history of gold/silver as money.  It dates back thousands of years, far longer than any paper money.

Occurrence

The interesting thing about these precious metals is that scientists actually have an excellent idea of the relative abundance of most of them.  The  chart on right shows the relative frequency of occurrence of gold, silver, as well as several other precious, and non-precious metals.

Gold is one of the rarest of precious metals, occurring only 0.004 parts per million.  Silver is approximately 18x more abundant, at 0.073 parts per million.

Several other industrial metals, copper, zinc, and nickel, are listed, and they are far more frequently found than their precious counterparts.

Relative Prices

Here then, we infer some very interesting information.  Assuming that demand for all metals are the same, we can then compare the price of each metal relative to each other (alternatively, relative price discrepancies could also tell us how the demand for each metal differs).

The below table illustrates just such a relative comparison, at spot prices as of 6/25/2010 (click to enlarge):

Rhodium ($2,640): underpriced relative to 6 metals, overpriced to 1
Platinum ($1,575): underpriced relative to 4 metals, overpriced to 3
Gold ($1,256): underpriced relative to 5 metals, overpriced to 2
Silver ($19): underpriced relative to 7 metals, overpriced to 0

All the industrial metals (copper, zinc, nickel) are overpriced relative to the precious metals.  As previously mentioned, this is a function of their increased demand due to industrial applications.  Zinc appears to be cheaper than peers, but this is mainly due to the larger toxicity of that element.

Gold is Pricier than Silver... (But Should it be?)

According to this, gold has a fair value range of $660 (index to Rhodium) to $1446 (index to Palladium) compared to other metals.  Silver has a fair value range of $36 (index to Rhodium) to $79 (index to Palladium).  Gold, at 65x the price of silver, is clearly overvalued relative to silver.  So what is causing this?

Ultimately, prices are determined by the relationship of supply and demand.  In this case, there appears to be a significantly higher demand for silver, perhaps for jewelry.  However, silver has more applications in industrial use, yet does not the command the industrial premium currently seen in other precious metals.

According to research reports, the long-term multiplier of gold to silver since the 1900's has been approximately 50x.  This means that for the past 100 years, gold has been overpriced relative to silver.  However, prior to this period, Gold has traded historically at a ratio of 15x relative to silver - significantly closer to the relative occurrence of the two elements.

It's difficult to say what the future will be.  My personal feeling is that silver is the more undervalued of the two metals, although I have a high suspicion that we may experience a bubble in gold that will blow the ratio of the two metals far past its current ratio of 65x.

"Gold and silver are money.  Everything else is credit." (JP Morgan)