For the savvy investor, the gold-silver ratio can be an essential tool in building a strong precious metals investment portfolio. Here’s why investors planning to invest in precious metals should learn more about it.
In this article:
- What Is the Gold-Silver Ratio?
- Why Does It Matter?
- How Was It Used in Its History?
- What Factors Affect the Gold Silver Ratio?
- How Is the Gold-Silver Ratio Relevant in Trading?
- Can the Gold Silver Ratio Tell Investors When to Buy or Sell?
All You Need to Know About the Gold-Silver Ratio
What Is the Gold-Silver Ratio?
In simple terms, the gold-silver ratio, otherwise known as the gold to silver ratio, is the ratio that shows the value of silver versus gold. More specifically, it tells investors the number of silver ounces that is equal the value of a gold ounce.
The price of silver and gold per ounce determine the gold-silver ratio. However, the amount varies over time since the market for both precious metals can fluctuate.
The ratio is always expressed as two numbers. The first number represents the number of silver ounces, while the second number is always “1,” which means one ounce of gold.
- A ratio of 17:1, for example, means it would take 17 silver ounces to equal the value of a gold ounce. In other words, it also means that gold is 17 times more valuable compared to silver.
- If an ounce of silver is presently worth $30 and an ounce of gold is worth $1,200, then it takes 40 silver ounces to equal one gold ounce. This makes the gold to silver ratio 40:1.
Why Does It Matter?
Those looking to buy gold and make an investment in the precious metals market, such as through a precious metals IRA, use technical analysis of the swings and trends in this ratio. They study the supply and demand for silver and gold before making significant investment decisions.
Before making any trade or move, one should always keep in mind their investment goals. This is crucial in coming up with an effective trading strategy, especially in today’s unpredictable financial markets.
The gold-silver ratio can vary from day-to-day. To those engaged in long-term trading, this may be of little value.
However, some ratios, like the gold to silver evaluation, often tell more about longer-term prices and trends.
How Was It Used in Its History?
Since the beginning of the tracking of precious metals, gold has always had a higher value than silver.
In today’s modern market, a number of factors drive the comparative prices of gold or silver. While this ratio floats daily based on the day’s valuations, such has not always been the case.
Record keeping of these prices began in 1687. Since that time, the ratio between the two precious metals has swung widely from 14 to 100.
Some governments attempted to fix the ratio at around 16:1 to 19:1 for monetary stability. In the 1800s, the ratio was at an average of 15:1.
However, it wasn’t until the mid-1800s and early 1900s when the formal tracking of the values began. With a series of coinage acts, the United States began setting up standards for its coins.
It followed Alexander Hamilton’s work on the original gold-silver ratio. He essentially helped build the foundations for the standards used in coins.
His work mattered heavily for practical reasons.
- During those times, for example, a single silver coin would have had to be huge when trading with a single gold coin. Hamilton’s work helped pave the way for silver no longer being a limited legal tender in the United States.
- The government also regulated what one could pay for with silver.
From then on, the gold-silver ratio remained more or less stable at around 16:1 and 17:1. During this period, bankers and traders often perceived 17 to be the universal ratio.
During the mid-to-late 1900s, the ratio moved up to 45:1 to 50:1. In unusual financial markets, this ratio saw extreme swings as well.
Nowadays, investors trade gold at values of around 60:1. In recent years, this has gone up to as high as 80:1, and even 93:1 this year.
What Factors Affect the Gold Silver Ratio?
While “market forces” are often what financial experts consider as the driver of the gold-silver ratio, the fact that silver has more industrial uses than gold, which means there’s higher demand as well, is a major factor.
When conditions favor it, such as when new technology produces a sudden boost in the demand for silver, silver prices can edge up quickly. When silver prices go up, the gold ratio then goes down.
Should the demand for silver suddenly go down, industrial pressures can also drop silver prices just as quickly. This can have a major impact on global financial markets as changes in the US market affect markets around the world and vice versa.
Recently, the precious metals investment demand has risen rapidly with more people showing interest in the industry. Unfortunately, producers of these products began speculating about its pricing.
In 2015, these speculations pushed prices down as it led to an oversupply.
How Is the Gold-Silver Ratio Relevant in Trading?
Because of its greater supply, silver has always had a lower market value compared with gold. Experts estimate that there is around 17 to 20 times more recoverable silver available than gold.
This figure helps peg the ratio at around 17:1. As mentioned, however, other factors also affect their actual market price.
Among speculative investments, gold is unique because it is non-consumable. This means that one can still recover its value even after use in most applications.
Speculative Investments Definition: Speculative investments, such as penny stocks, fine art, and real estate, are investments that have a high degree of risk or those with emphasis on high degrees of fluctuations. Investors who purchase speculative investments buy goods in an attempt to trade them and earn profit from market changes.
More experienced traders and precious metals investors, however, use the historical gold-silver ratio ranges in their technical analysis. This helps them come up with a view of the present precious metals market.
Keep in mind, however, that no one should consider a single number as his or her signal to buy or sell gold and silver.
Can the Gold Silver Ratio Tell Investors When to Buy or Sell?
Some traders consider gold-silver ratio averages as the indicator of possible price changes. However, there are no guarantees in the precious metals market.
Generally, investors believe that with a ratio below 50:1, gold is the better investment. When the ratio goes over 50:1, silver becomes the better investment.
Before making any investment decisions, one should always remember that the gold-silver ratio cannot guarantee anything. Sophisticated investors, however, know that the gold-silver ratio is still an essential part of a precious metals investment philosophy.
Long-term investors use this to work with advisors and develop a target ratio for a high and low point. When the prices reach these points, the investment portfolio then adjusts by either acquiring more silver or gold.
For more hands-on traders, the gold-silver ratio acts as a rebalancing tool. They rebalance depending on the current prices.
In general, a higher ratio shows a cheaper price of silver. For some, this could indicate that the market favors the acquisition of silver.
In a similar way, investors tend to see a low ratio as the time to rebalance their portfolios away from silver and more towards gold. This is because of the cheaper pricing of gold.
If the ratio hits 100 or higher, for example, a gold investor would sell off one gold ounce to buy 100 silver ounces. The same applies if the ratio hits below their low point, this time selling silver ounces to buy an ounce of gold when it has an attractive price.
When used properly, the gold-silver ratio can make a huge difference to one’s investment strategy, especially in the precious metals market. As with any investment, however, it is still best to consult with qualified financial advisors to avoid making rash or impulsive investment decisions.
Do you have other questions about the gold-silver ratio? Ask us in the comments section below!