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The Gold-to-Silver Ratio

Apr 30, 2018 | Jerry Smith |

The Gold-to-Silver Ratio

As an investor, it’s easy to be overwhelmed by the sheer number of indicators that can help you determine when and when not to invest. One of the challenges as an investor is to narrow down the indicators to a workable number.

Factors like inflation, debt, and economic uncertainty play a role to encourage investors to invest in precious metals. To determine in what type of metal to invest, a commonly used indicator is the gold-to-silver ratio.

What is the gold-to-silver ratio?

At its very basic, the gold-to-silver ratio is the amount of ounces of silver it takes to purchase one ounce of gold. Lately, the ratio has been around 80:1, which means it would take 80 ounces of silver to buy 1 ounce of gold.

To determine the ratio, you can use one of many websites, or you can simply calculate it on your own:

The price of gold divided by the price of silver

Using recent market prices, here is an example:

$1,325.55 / $16.50 = 80.33

What does the gold-to-silver ratio really mean?

The ratio is used by investors trading gold, silver, and other precious metals to determine the right time to buy or sell a particular metal. When the ratio high, silver is cheap relative to gold, so investors consider silver to be favored. When the ratio is low, it favors gold and signals that it might be a great time to purchase gold.

However, the ratio fluctuates madly, which makes it difficult for inexperienced investors to properly read the signals and profit from trading.

The gold-to-silver ratio is usually used as motivation for diversifying portfolios (as we discussed in a recent article, diversifying your stock portfolio with precious metals will make it perform better)—if one investment asset does poorly, alternative investments may do better, thereby making up for the losses.

The historical development of the gold-to-silver ratio

The oldest records go back to 1687. From then until around 1900, the ratio fluctuated between 14 and 100, hovering around 16 closer to 1900, when it steadied. At that time, many countries were using gold- and silver-backed currencies, and countries like the US and France set statuary limits on the ratio.

In addition, it was estimated by the US Geological Survey that there was almost 18 times more silver than gold in the earth, which could be another reason behind the ratio in those days.

In the past century, the gold-to-silver ratio has fluctuated wildly and averaged around 50.

What are the predictions for the gold-to-silver ratio?

It’s being predicted by some experts that the gold-to-silver ratio will drop and steady around the pre-1900 average of 16:1. However, some of the strongest proponents for this are also some of the most passionate proponents for investing in silver. We do not subscribe to this opinion. Since a 16:1 ratio was only in existence under a gold standard of some kind, and immediately changed after the gold standard was removed. What strengthens our opinion is that in 2011, when silver moved to its all time high, it was still at a ratio of over 35:1 to gold. No where near the 16:1 ratio.

If the ratio were to move towards 16:1, the silver price would have to increase to roughly $105 an ounce. Were the ratio to drop to its long-term average of 50:1, the silver price would need to approach $26.5 an ounce.

While the gold-to-silver ratio may be a valuable tool for precious metals investors, it’s not the only indicator a precious metals investor should look into. There are other indicators right now that contradict this indicator and point to the ratio not necessarily changing anytime soon. If you are interested to invest in silver, contact us and a Sr. Advisor will be able to discuss with you the prospects of silver with the most updated information.