The gold to silver ratio is often discussed and used to determine where the price of each should or could be considering the ratio. Historically, the ratio has been set at 15 to one. That is, the value of 15 ounces of silver is equal to the value of one ounce of gold. Currently, we are at about 38:1.
But where did the ratio come from? Who set it? Biblical scholars would point to information in the Bible and combine it with archaeological finds to confirm that God may have been the original authority setting the value of each. More recent history brings us to the U.S. own Original Coinage Act of 1792.
In 1792 our Federal Monetary System was created after numerous failed attempts to introduce paper currencies into commerce. The Coinage Act of 1792, was passed in order that a common monetary system could be created for the new United States.
Prior to doing so, the money was based largely on the British system of pounds, shillings and pence. Use of a variety of other foreign coins, made of both gold and silver, found no favor amongst merchants and citizens alike as it was cumbersome to calculate and convert relative values of each in their daily transactions.
The Act called for the minting of Gold and Silver coins. Taking into consideration the weights of the variety of foreign coins in circulation, Alexander Hamilton, then Secretary of the Treasury, made recommendations of specific weights and metal content for each coin.
In studying the values set for foreign coinage, Hamilton observed that gold carried 15 times more value per the same unit of measure as did silver. So it was in the Act that a gold dollar would contain 24.75 grains of gold and a silver dollar would contain 371.25 grains of silver. In consideration of the fact that a gold dollar would be very small, and that there was really no need for two kinds of dollars to circulate, the gold coin to be minted would be a $10 coin called the Eagle.
It's interesting to note that Hamilton's calculations of the value of silver to gold came to equal the same ratio as set in Biblical times. 15 ounces of silver equal to 1 ounce of gold.
Today the ratio sits near 38:1. It may surprise some to learn that as recently as September 2008, the ratio was 83:1. With silver demand exploding some expect the ratio to close even further. One analyst puts silver at $52-$56 an ounce by June 2011, closing the ratio only slightly as he also projects gold significantly higher as well. see article
Will silver eventually close the gap? In 1980 as both gold and silver reached what we still refer to as all-time highs, (after adjusting for inflation and debasement of the dollar) the gap closed to its historical level. Silver reached $54 an ounce and Gold hit $850.
Whether it will happen again, only time will tell. But if it does, that's probably a good sign that it's time to sell silver or trade it all for gold.