The gold-to-silver ratio is at a near-record high—higher than it has been in many years. How did it get there, and what does it mean for you? U.S. Money Reserve gives you insights and details to help you better understand how silver and gold prices are performing and what their performance could mean for you.
What is the gold-to-silver ratio?
The gold-to-silver ratio calculates how many ounces of silver it takes to buy an ounce of gold. A smaller number can mean silver is outperforming gold; a bigger number can mean gold is outperforming silver.
By tracking the prices of the two precious metals, you can compute the ratio—simply divide the price of gold by the price of silver. Calculating the ratio can help you determine when to buy gold or silver and which metal to purchase.
The ratio has historically fluctuated. The U.S. government set the ratio at 15:1 from 1792 to 1833. It rose to 16:1 in 1834. President Franklin D. Roosevelt set the ratio at 35:1 in 1939. But in 1944, the ratio dropped back to 15:1.
Since 1979, the ratio has been on a mostly upward trajectory. Looking at the past four decades or so, the ratio hit its rock-bottom point of 15:1 in December 1979. But by January 1991, the ratio had soared to 100:1. A little over 20 years later, in March 2011, the ratio had plunged to 38:1. For most of the past two decades, the ratio has ranged from roughly 50:1 to 70:1.
In recent times, the ratio has risen steadily. In early May 2020, the ratio skyrocketed to around 115:1, down from a record high of 125:1 in March 2020. Based on the current ratio, silver is considered inexpensive relative to gold.
If the current rally in the gold-to-silver ratio is like the one in 2008, amid the Great Recession, a ratio of around 118:1 could be in the cards.
Why is the gold-to-silver ratio so high?
A number of factors have driven up the gold-to-silver ratio. Here are five of them:
- Economic uncertainty
- Low interest rates
- Instability in the equity markets
- Low U.S. Treasury yields
- Weakness of the U.S. dollar
Against this backdrop, a lot of people are seeking a safe haven for their assets and a hedge against financial risk, and many of them have turned to gold. Fast-paced gold demand has helped push up the price of gold and has triggered never-before-seen gold-to-silver ratios.
The Wall Street Journal further explains that the price of silver has not matched the recent spike in the price of gold because depressed industrial demand for silver has outweighed shifts in the gold market. In addition, recent mining shutdowns have hurt silver production.
What does a high gold-to-silver ratio mean for you?
Keeping on top of the gold-to-silver ratio can help you identify a time you feel best about buying precious metals and whether to buy gold or silver.
Mickey Fulp, a certified geologist, says the gold-to-silver ratio “lends valuable guidance” when you’re trying to pinpoint how gold and silver are performing in the market in relation to one another. A ratio above 80:1 “is evidence that silver is severely undervalued and is a strong buy signal for the metal,” Kulp says.
Although silver functions mostly as an industrial metal, Kulp says, “It is strongly tied to the price of gold and is generally more [sensitive] during upside and downside moves of the yellow metal. In times of financial distress and economic calamity, silver tends to behave more like a precious metal with widespread [buying] of gold trickling down.”
Kulp does note, though, that gold serves as his “safe haven and insurance policy against financial calamity.”
One Seeking Alpha contributor, Oyat Advisors, writes that they traditionally include precious metals in their asset allocation, representing nearly 25% of liquid assets. Thus far, the financial management firm has focused solely on physical gold for its metals allocation, but now it’s looking at complementing physical gold with a small amount of physical silver.
In fact, despite the current high gold-to-silver ratio, some experts are optimistic about the long-term fundamentals of silver, particularly thanks to its various industrial uses.
Patrick Heller, a numismatist in Michigan, even made the case in March 2020 that the long-term price of silver could outpace the long-term price of gold “by well over two times from where [it is] at today.” He believes current ratios don’t accurately reflect the market for physical gold and silver.
In fact, Kitco contributor Phillip Streible believes that silver will shine as a “leader” and that the gold-to-silver ratio could decrease “because of an outpacing increase in silver prices.”
Track gold and silver prices with U.S. Money Reserve’s price charts any time of day or night. Then, when you feel like the time is right, make your move.