With 1 ounce of gold selling for $955 and an ounce of silver selling for only $14.63, gold is currently about 65 times the price of silver. Last year the ratio was only 50 times. This is significantly above the long-term historical ratio of gold being worth 16 times more than silver. Even in nature, silver is about 17 times more abundant than gold, and unlike gold the quantities above ground are constantly diminishing because of its industries use.
By these standards, silver is undervalued when compared to gold. Check out this Chinese news video advising investors to buy silver!
Going by the historical ratio of 16, silver should trade for nearly $60/ounce. Or conversely gold should sell for a mere $240/ounce. Although I have a gut feeling that one is more likely than the other, if you wanted to trade this without making a directional bet, you could enter a paired trade.
In this case, the pair trade would be to short gold and go long silver, however with all the manipulation that seems to be going on with regards to both of these commodities (see the last post on Fraud in Silver ETFs), there’s no guarantee when the ratios will converge to the historical averages. Unlike the gold-platinum ratio which was a great trade for futures traders in December 2008 (The price of platinum dropped below that of gold for a few weeks creating a great paired trade), this may not pan out for a long time.