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Gold Silver Ratio

Gold Silver Ratio

Gold silver ratio

First Published: 9 November, 2022
Last Updated: 23 November, 2022
Fact-checked by Adrian Müller

If you are wondering what the gold-silver ratio is and why it is very important, you are not alone. Many people are curious about gold and silver’s physical and monetary properties. Still, they don’t understand why these two metals are so important. The gold-silver ratio is one of the most significant ratios in precious metals investing.

It’s a way of understanding how much of each metal is necessary to create the right balance in a portfolio. This ratio is also essential for investors who want to know when to sell their holdings and diversify into another metal. Many people are curious about the gold-silver ratio and what it means for the economy’s future.

In this article, we’ll explore what the gold-silver ratio is and what it may mean for the future of the global economy. We’ll also discuss some interesting theories about its origins and possible implications. So, read on to learn more about this exciting topic!

Table of Content

Current Gold Silver Ratio

Please see the current value of the Gold Silver Ratio and its historical development in the following chart:

What Is The Gold-silver Ratio?

The gold-silver ratio is the value of an ounce of silver in relation to an equivalent weight of gold. It is known as the mint ratio. Simply put, it is the amount of silver (in ounces) you need to purchase one ounce of gold.

Traders may use it to diversify the number of precious metals at their disposal. When gold is priced at $500 per ounce and silver is priced at $5, traders refer to the gold-silver ratio as 100:1. Similarly, if gold costs $1,000 per ounce and silver cost $20, the ratio is 50:1.

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The ratio now floats and can fluctuate drastically. This is because market forces evaluate gold and silver daily, which was not previously the case. Governments looking to gain monetary stability have established the percentage throughout history at various periods and locations.

What Does The Gold-silver Ratio Measure?

The gold-silver ratio measures the relative strength of gold and silver prices. It illustrates the ounces of silver required to buy one ounce of gold. This provides you with the gold-silver ratio, a quick method to see which of the two primary precious metals is increasing in value compared to the other.

When the gold-silver ratio increases, gold has grown more costly than silver, and the less expensive metal may offer better value. It reached a new all-time high of over 125 in March 2020, when the COVID crisis boosted gold investing but destroyed the silver price as global economies went into lockdown.

When the ratio lowers, it indicates that gold’s price has fallen compared to silver. It plummeted sharply from the 2020 peak in the second part of the year, as gold reached new all-time highs in USD, GBP, and EUR terms.

It fell below 70 ounces of silver to 1 ounce of gold when the global industry reopened in early 2021. Some analysts, traders, and investors “trade the ratio,” purchasing silver when the ratio is high and buying gold when the ratio is low.

The Big Question: Gold Or Silver?

If you compare gold and silver to determine the better investment, several factors come into play, such as utility, volatility, etc. Let’s look at them individually and decide which is the better investment, gold or silver.

1. Utility

The utility is the most important distinction between precious metals and other commodity investments. Most other commodities are valued by investors based on supply and demand.
For example, if you want to invest in coffee, you may estimate costs based on how much coffee people are currently consuming, how tastes are changing, and so on. Precious metals are unique in that they have a relatively lower commercial utility.

Gold and silver have limited consumer or industrial applications compared to other metals. Silver has far more utility in various industries and commercial sectors. Approximately half of all silver purchased and sold on the market is utilized for commercial purposes.

Their uses range from dentistry to electronics. Aside from jewelry, gold has virtually few commercial applications. This provides investors with a foundation for judging and forecasting silver price swings.

2. Cost

Although the price difference between gold and silver varies, the gap remains consistent. Gold is and always has been more expensive than silver. Because of the price difference, an investor has two choices. Naturally, silver is far easier to invest in than gold. You can acquire more silver for less money, making it easier for less liquid investors to invest in silver. As with any financial asset, this might expose you to bigger potential profits and losses because when you deal in silver, the scope of your investment is likely to fluctuate more.

3. Volatility

Volatility means how much the price of an asset changes from the average price. Low-cost assets are also very volatile because slight price fluctuations affect the investment. Silver, for example, only has to vary in price by $2.57 per ounce to have a 10% price variation at present values. To compare, the price of gold would vary by $2.57, or a 0.0013% change. Volatility isn’t always bad, but it’s something to keep an eye out for, especially if you’re looking for a long-term investment.

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4. Relationship To The Broader Market

The gold price fluctuates in the opposite direction of the stock market. Gold is considered a “countercyclical investment.” This means it tends to rise when mainstream assets fall and vice versa. Historically, as the stock market declines, investors rush to gold.

When circumstances are good, investors tend to withdraw their money from gold and invest it in assets that have a stronger relationship to the wider economy. Many investors keep gold in their portfolios only to provide liquidity during a downturn.

A recession is the worst moment to sell stocks but the perfect time to acquire them. Existing gold investment can provide a valuable asset to sell during a recession, allowing you to receive other people’s cheap assets without selling your own.

On the other hand, silver tends to move in lockstep with the general economy more than gold. This is primarily due to the same business uses that make silver a more dependable asset. When the economy slows, industries use less silver for manufacturing, causing the price to fall.

So as you can understand, there is no better investment. It all depends on the market condition and your investment method. Silver is a good investment when economic conditions are good. Gold, on the other hand, can be the savior during bad times.

Current Market: Gold Vs. Silver Price

Although gold and silver prices fluctuate throughout the year, the price gap remains relatively the same. The ratio hovers around 90 to 100, meaning that one-ounce gold is about 90 to 100 times costlier than one ounce of silver. It also means that with the price of one ounce of gold, you can buy one hundred ounces of silver.

Currently, the price per ounce of gold is $1671, and the price of one ounce of silver is $18.30. Note that the price of precious metals, especially gold and silver is never constant. It can change in the next minute.

As the price change is not that much, you can take an idea from the price I mentioned above. Following a live chart is always advisable if you want to follow the gold-silver ratio and the price of each closely.

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How Do I Interpret Its Value?

As we have already discussed, the gold-silver ratio is the quantity of silver required to purchase one ounce of gold. Many investors who deal in precious metals, and gold traders, utilize this connection as a fundamental signal to determine the optimum moment to buy or sell.

If the ratio is high, it indicates now is the time to buy silver since the ratio favors silver. For example, suppose the gold-silver ratio is 50:1. In that case, investors only need to part with one ounce of gold to obtain 50 ounces of silver.

Similarly, a lower ratio indicates that the price of gold has decreased, and it is now time to invest. This is how to interpret the gold-silver ratio.

What Is A Good Gold-to-silver Ratio?

The gold-silver ratio has been around for thousands of years. Menes, the first Egyptian pharaoh, decreed in 3000 BC that two and a half parts silver were equal to one part gold. The ratio shows the two metals’ replacement potential. Both gold and silver have extensive histories as commodities and as currency.

Gold and silver have been emblems of immense riches for thousands of years. Many silver investors feel the ratio should be fixed at 16:1, the gold-to-silver ratio in the earth’s crust. Others believe this ratio should fall even more because silver production is nine times more than gold.

Silver supporters claim that the ratio should favor silver over gold because of the quantity of silver utilized in industrial operations and manufacturing. The global demand for gold surged in 2022 due to the Covid-19 epidemic. In reality, traders still buy gold as a haven in unpredictable market conditions.

During this time, as the industrial demand remained modest, silver stayed steadier than gold. As a result, the gold-silver ratio may continue to hover above 100 for the foreseeable future.

Why Is The Gold-to-silver Ratio So High?

The largely acknowledged reason for gold’s greater price is that gold is more frequently used in jewelry. Gold is also considered an alternate currency and is in more demand by central banks and private investors than silver.

Gold is significantly more costly than silver since it is produced in considerably lower quantities. It is believed that all of the gold mined throughout history and yet to be mined can fit in slightly more than three Olympic-sized swimming pools, totaling 244,000 metric tons.

In comparison, silver has more or less 1.74 million metric tons extracted to this date – other reasons like mining profitability, changes in interest rates, and industrial uses. However, the main reason gold’s price is higher than silver’s is its low supply and demand. Hence the gold-to-silver ratio is very high.

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What Is The Highest Ever Gold-to-silver Ratio?

Recently, the gold-silver ratio has varied and has never remained constant. This is mainly because the values of these precious metals fluctuate wildly daily. However, before the twentieth century, governments established the ratio as part of their monetary stability policy.

For hundreds of years before then, the ratio was relatively consistent. It ranged between 12:1 and 15:1. The Roman Empire formally established a 12:1 ratio. With the Coinage Act of 1792, the United States government set the ratio at 15:1. They were one of several nations that adopted a bimetallic standard monetary system throughout the nineteenth century.

In a bimetallic standard monetary system, the value of a country’s monetary unit is determined by the gold and silver ratio. However, the fixed ratio period ended in the twentieth century as many countries moved away from the bimetallic currency standard and, finally, completely away from the gold standard.

Since then, the gold and silver ratio has traded independently on the open market. In 2020, the gold-silver ratio hit its highest point since 1915, 114.77. The ratio was lower in subsequent years due to the COVID pandemic. In 2022, the ratio ranges from 65 to 95.

Is The Gold-to-silver Ratio Important?

Having such a long history of how gold and silver prices interact with one another can be beneficial to investors. The current ratio of approximately 69:1 suggests that silver may be the more appealing investment prospect if precious metal prices rise.

However, it is critical to note that the gold-to-silver ratio is not a fundamental investing component or catalyst in and of itself. It’s a secondary aspect to consider once you’ve examined the actual drivers of gold and silver prices.

Although there is no set figure, the gold-silver ratio remains a popular instrument for precious metals traders. So, if the ratio is larger and investors feel it will fall in tandem with the price of gold in comparison to silver, they may decide to purchase silver while shorting the same amount of gold.

So, what is the significance of this ratio for investors and traders? Investors may earn regardless of whether the price of the two metals falls or rises if they can predict where the ratio will move. Furthermore, the gold-silver ratio is used for various future investment purposes. Let’s take a look:

1. Investment In The Future

This entails buying gold or silver futures contracts outright or buying one to sell the other if you believe the ratio will expand or shrink. Futures trading only takes a modest amount of money upfront to conduct a much larger deal. For the uninitiated, this may be a risky undertaking. An investor can use a margin to play futures, but that margin can potentially bankrupt the investor.

2. ETF

ETFs (Exchange Traded Funds) provides an easy and convenient way to trade the gold-silver ratio. Again, you may execute your trade-turn strategy by purchasing the proper ETF – gold or silver. Some investors choose to maintain open holdings in both ETFs and add to them proportionately rather than investing in gold or silver in an all-or-nothing manner.

They purchase silver when the ratio grows and purchase gold when it falls. This eliminates the need for the investor to speculate on whether or not the highest ratio levels have been achieved.

3. Option Strategies

Investors may also use options methods in gold and silver, many of which entail spreading. When the ratio is high, you may buy puts on gold and call on silver, and vice versa when the ratio is low. The bet is that the spread will decrease over time in high-ratio climates while increasing in low-ratio climates.

Futures contracts can benefit from a similar method. On the other hand, options allow the investor to put up less capital while reaping the benefits of leverage with less risk. The time decay component of options tends to diminish any genuine gains achieved on the transaction as the options contracts approach expiration in time.

4. Pooled Accounts

Commodity pools are vast, private metal holdings that are offered to investors in a range of currencies. The same tactics that are used in ETF investing can be used here. The benefit of pool accounts is that the investors obtain real metal whenever they want. This is different from the situation with metal ETFs, which need extremely high minimum holdings to obtain physical delivery.

5. Bullions And Coins

For various reasons, investing in bullion and coins with actual gold is not suggested. These include liquidity, convenience, and security. You can acquire and hold real gold and silver for long-term investment goals, but trading in and out of these metals in bullion and coins is complex and expensive.

Historical Development Of Gold Silver Ratio

Historically, the gold-silver ratio has only shown significant volatility since soon before the turn of the twentieth century. Hundreds of years before that, the ratio, which governments frequently used for monetary stability, had been pretty consistent.

The Roman Empire formally established a 12:1 ratio. In 1305, the ratio reached 14.2:1 in Venice and remained there until 1330, when it decreased to 10:1. In certain parts of Europe, in 1950, it plummeted to 9.4:1. It returned to 12:1 in the 1450s. Before the Coinage Act of 1792, the United States government set the ratio at 15:1.

The discovery of vast supplies of silver in the Americas and repeated government attempts to control gold and silver prices resulted in far more volatility in the ratio during the twentieth century. In 1934, President Roosevelt set the price of gold at $35 per ounce. The ratio rose to new heights, reaching a high of 98:1 in 1939.

Following the end of World War II and the 1944 Bretton Woods Agreement, which tied foreign currency values to the price of gold, the ratio progressively decreased. First in the 1960s and then again in the late 1970s once the gold standard was abandoned.

From there, the ratio gradually increased during the 1980s, culminating at 97.5:1 in 1991, when silver prices fell to less than $4 an ounce. Throughout the twentieth century, the average gold-silver ratio was 47:1. In the twenty-first century, the ratio has primarily fluctuated between 50:1 and 70:1. The ratio went above that mark in 2018 with a peak of 104.98:1 in 2020. In 2011, the ratio was at its lowest point of 35:1.

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Forecast

Many experts predict that the gold and silver ratio will change in the future, maybe in 5 to 10 years. The silver price will increase, and the ratio will balance out. However, it is almost always 100% certain that the cost price of silver will never be greater than gold.

For investment, it’s better to rely on the current market status rather than depending on forecasts.

Conclusion

One can assume that the rally in gold prices will continue due to its attractiveness and scarcity. However, we are still waiting to see whether the silver price stabilizes due to rising demand from emerging markets. Meanwhile, keep an eye on your savings account because precious metals have consistently been one of the best options for long-term wealth creation!

The gold-silver ratio has always been a trusty friend in your financial journey. The market also plays a major role, making it one of the most reliable tools for analyzing the economy. But if you know how to use this valuable information correctly, there’s nothing that can stop you from making profitable trades and investments!

About the author – D. Schmidt

I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.
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