Gold Silver Ratio: What It is, How It Works, Example

Open a BullionVault account today and you can claim 4 FREE grams of silver to test our service for yourself at no risk or cost. One estimate in the early 2000s said the above-ground stockpile of gold could meet more than 6,600 days of demand. For silver that number was below 260, more in line with coffee, cocoa and other consumed commodities. Boom areas in recent years have been electrics, soldering alloys and especially photovoltaic cells for solar energy. After 2018’s new record global spend however, the PV boom may have peaked for the time being, as China and India join Europe in pulling back subsidies for new solar panel installation. Unlike most other commodities however, gold isn’t consumed when it is used, and because of its high value people rarely throw gold away or try to destroy it.

1. For hundreds of years prior to that time, the ratio, often set by governments for purposes of monetary stability, was fairly steady.
2. Understanding this ratio helps assess the relative market positions of gold and silver.
3. Shipping gold to where it was most highly valued offered a bumper return in silver.
4. A high ratio implies that silver is undervalued, or gold is overvalued, and vice versa.
5. It is not recommended that this trade be executed with physical gold for a number of reasons.

For those worried about devaluation, deflation, currency replacement, and even war, the strategy makes sense. Precious metals have a proven record of maintaining their value in the face of any contingency that might threaten the worth of a nation’s fiat currency. Conversely, a narrowing ratio could signal that gold is becoming more affordable relative to silver, offering different investment opportunities.

The History of the Gold-Silver Ratio

Predicting the future movements of the gold-to-silver ratio involves understanding a complex web of economic indicators, market trends, and global events. Experts in the field often look to historical patterns, current economic policies, and technological advancements in mining and industry to forecast future changes. The use in trade and warfare and as standards for monetary systems across different civilizations marks the historical journey of gold and silver. The gold-silver ratio is calculated by dividing the current price of gold by the current price of silver. It is not recommended that this trade be executed with physical gold for a number of reasons.

For the hard-asset investor concerned with the ongoing value of their nation’s fiat currency, the gold-silver ratio trade offers the security of knowing, at the very least, that they always possess the metal. The gold-to-silver ratio serves as an indicator of the market’s health and as a compass guiding precious metal investors and collectors. Understanding this ratio helps assess the relative market positions of gold and silver. A high ratio implies that silver is undervalued, or gold is overvalued, and vice versa. The gold-to-silver ratio is a gauge for investors looking to profit in the precious metals market. Investors often use the gold-to-silver ratio to switch holdings between gold and silver, aiming to capitalize on market movements.

The most common method of trading the ratio is that of hedging a long position in one metal with a short position in the other. The primary reason the ratio is followed is that gold and silver prices have such a well-established correlation and have rarely deviated from one another. Many investors today feel the ratio should trade in line with the physical ratio of gold to silver in the earth’s crust. The availability of the the two metals certainly affected their relative prices in the past.

Historical overview of gold vs. silver prices

This movement arose partly due to the discovery of vast silver deposits, which devalued silver and disrupted the bimetallic ratio. The resulting debate and economic instability eventually led to the U.S. adopting the gold standard, phasing out silver’s role in defining the U.S. dollar’s value. Throughout history people used both gold and silver as money, minting coins from these two rare and beautiful precious metals. The increasing industrial applications of silver, especially in areas like renewable energy and electronics, may influence its future value. On the other hand, gold’s enduring status as a safe-haven asset could continue to drive its demand during periods of economic uncertainty.

The gold-to-silver ratio is the relationship between the two precious metals’ prices. The ratio is an exchange rate representing how many ounces of silver can be converted to one ounce of gold. The gold-to-silver ratio has been an important aspect of monetary policy since early Roman times. Historically, some governments legally established the ratio to achieve financial stability and prevent economic depression. Today, the ratio fluctuates with the market, changing as the spot prices of gold and silver rise and fall. That’s mainly due to the fact that the prices of these precious metals experience wild swings on a regular, daily basis.

Likewise, the three times the gold / silver ratio has fallen below 20 in the past, it has markeda period when gold was relatively inexpensive compared to silver. If they can anticipate where the ratio is going to move, investors can make a profit even if the price of the two metals falls or rises. On the supply side, silver mining output is highly inelastic, because 72% comes as a byproduct of mining other metals.

Real World Example of the Gold/Silver Ratio

A 2008 buy of 80 ounces of silver against a short sell of one ounce of gold would have resulted in a profit of $1,520 in silver against a loss of $550 in gold, for a net profit of $970. There’s an entire world of investing permutations available to the gold-silver ratio trader. What’s most important is that the investor knows their own trading personality and risk profile.

What Is the Gold-Silver Ratio?

In this case, the investor could continue to add to their silver holdings and wait for a contraction in the ratio, but nothing is certain. This example emphasizes the need to successfully monitor ratio changes over the short term and midterm to catch the more likely extremes as they emerge. There are a number of ways to execute a gold-silver ratio trading strategy, each of which has its own risks and rewards. The ratio is important to investors as they trade it with the purpose of hedging certain metal positions as well as the ability to generate profits from their positions. Geologists today believe silver is around 19 times more abundant than gold in the earth’s crust, but modern silver mine output worldwide is only 8 times greater than gold’s by weight each year. Because of the silver market’s size and volatility, speculative trading in the grey metal is much heavier than gold, relative to the physical market’s underlying value.

Investors in the precious metals market should stay informed to improve their chances of successful investing. We recommend consulting with a financial advisor before https://www.dowjonesrisk.com/ making major investment decisions. This is the best of savvy investment strategy; take a simple mathematical equation and trackhistorical price behavior.

Which factors influence the gold-to-silver ratio?

These exchange rates would change based on the perceived economic strength of the nation in question. The gold/silver ratio (GSR) is the current price of an ounce of gold divided by the current price of an ounce of silver. It’s a simple numerical calculation that shows how many multiples gold is trading relative to the price of silver, a common indicator used by precious metals investors worldwide. The gold/silver ratio measures the number of ounces of silver required to purchase one ounce of gold. Despite not having a fixed ratio, the gold-silver ratio is still a popular tool for precious metals traders. They can, and still do, use it to hedge their bets in both metals—taking a long position in one while keeping a short position in the other metal.

But the era of the fixed ratio ended in the 20th century as nations moved away from the bimetallic currency standard and, eventually, off the gold standard entirely. Since then, the prices of gold and silver have traded independently of one another in the free market. During that period, the price of silver rose from around $11 an ounce to approximately $30 an ounce.

So most of the gold ever mined in history still exists in someone’s hands somewhere. Silver coinage continued through to the 1950s and ’60s in the United Kingdom and the United States. But the metal’s value had no bearing on the value of money, becoming just a token like copper or nickel coins.

Therefore, it could be best to use long-dated options or LEAPS to offset this risk. The convergents of this continued fraction (2/1, 5/2, 12/5, 29/12, 70/29, …) are ratios of consecutive Pell numbers. These fractions provide accurate rational approximations of the silver ratio, analogous to the approximation of the golden ratio by ratios of consecutive Fibonacci numbers.