The Gold-to-Silver Ratio: What is It and Why Does It Matter?
For experienced investors, the gold-to-silver ratio is one of many indicators used to determine the right (and wrong) time to buy or sell their precious metals.
Other factors – including economic uncertainty, inflation frenzy and debt – have encouraged millions to invest in gold and silver, and in the past few years, small-scale investors have begun to climb aboard.
Yet despite these market developments, to many, the gold-to-silver ratio remains a vague, elusive mystery.
So what IS the Gold-to-Silver Ratio and why does it even matter?
Good question. First, a simple definition: Basically, the gold-to-silver ratio is the amount of silver it takes to purchase one ounce of gold.
At the time this was written, the gold-to-silver ratio stood at approximately 50 to 1.
That means, at the current price, it would take 50 ounces of silver to buy 1 ounce of gold.
While there are countless websites providing the current ratio, it’s relatively painless to calculate on your own.
Simply take the price of gold, divide it by the price of silver and Voilà! You have the gold-to-silver ratio.
Here is an example using recent market prices:
$1644 (gold price) ÷ $31.60 (silver price) = approximately 52 (Gold-to-Silver Ratio)
Thanks for the information, but what does it really mean?
Investors who trade gold bullion, silver bullion and other precious metals scrutinize the gold-to-silver ratio as a signal for the right time to buy or sell a particular metal.
When the ratio is high, the general consensus is that silver is favored. This is because, relative to the ratio, silver is somewhat cheap.
Conversely, a low ratio tends to favor gold and may be a signal it’s a good time to buy the yellow metal. Many large-scale, experienced investors may trade their silver for gold as the ratio drops.
Unfortunately, because the gold-to-silver ratio fluctuates so wildly, it can be difficult for novice or small-scale investors to read the signals and make a profit.
Typically, the gold-to-silver ratio serves as an impetus for diversifying holdings (experienced investors agree that diversity is good). If one investment flops, alternate investments in your portfolio pick up the slack – or losses.
Historically, what did the Gold-to-Silver Ratio look like?
Since 1687 – as far back as the records reach – the gold-to-silver ratio vacillated between roughly 14 and 100. Around 1900, the ratio steadied, remaining relatively flat.
Indeed, prior to 1900, the gold-to-silver ratio hovered around 16. This was likely because many countries were using gold- and silver-backed currencies. For instance, France and the United States (among others) assigned statutory limits on what the ratio could be.
Also, the U.S. Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, which could provide another explanation for the pre-1900 gold-to-silver ratio average.
Throughout the twentieth century though, the gold-to-silver ratio has averaged about 47-50 and has fluctuated wildly at times
What does this mean for the future?
Some experts predict the gold-to-silver ratio will return to its long-term, pre-1900 average of 16 to 1. Many factors are cited in this favorable claim. It's worth noting however, among these experts are some of the most ardent advocates for silver investing.
In the end, in order for the ratio to return to its pre-1900 average, the price of silver would need to rise to approximately $105 per ounce. Likewise, if the ratio were to drop to its long-term average, silver prices would rise to about $61 per ounce.
The gold-to-silver ratio is indeed one of several valuable tools used to determine the optimum time to buy gold or silver bullion.
However, it is wise to avoid haste. Only the most experienced investors make profits using a short-term view, and even they suffer errors in judgment.
With patience, research and a long-term view, you may choose to buy silver when the ratio is high – buying higher quantities with fewer dollars.
Disclaimer: Information contained in this article is NOT to be considered investment advice. Do your own research and evaluate your individual situation before making investment decisions