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Understanding the Gold-to-Silver Ratio

John-Rothans

Written by John Rothans

Oct 3, 2016

What is the gold-to-silver ratio and why does it matter? This question is fundamental to understanding the relationship between silver and gold. What's more, this ratio is one of the many key indicators used by seasoned precious metals holders to help determine the right time for them to buy silver or gold, in light of their portfolio goals. Read on to find out what this important ratio is, what it means, and how you can use your newfound understanding to help decide when might be the best time for you to expand your precious metals portfolio.

What is the gold-to-silver ratio?

The gold-to-silver ratio measures how many ounces of silver it takes to buy an ounce of gold. A smaller number is a sign that silver is outperforming gold and a larger number indicates the opposite, that gold is outperforming silver. In theory, the bigger the number, the more silver you would need to purchase one ounce of gold. If you always have your eye on the prices of the two precious metals, you can easily calculate the ratio yourself by dividing the price of gold by the price of silver.

Price of Gold / Price of Silver = The Current Gold-to-Silver Ratio

According to economist Arkadiusz Sieron, this simple yet important parameter helps measure the “relative value of gold and silver.” Interested buyers use the ratio as a timing indicator to help them decide when to buy gold or silver, or which metal to buy at any given time, he adds.

For much of history, the ratio mirrored the natural occurrence of silver to gold as mined from the earth, which is around 17.5. The ratio was set at 15:1 by the U.S. government from 1792 to 1833 and increased to 16:1 in 1834, notes geologist Michael Fulp on Kitco. To get a better idea of how the gold-silver ratio has fluctuated in the past, take a look at the chart below, from Sieron via Kitco. It compares the gold-silver ratio (in red, right axis), the price of gold (yellow line, left axis), and the price of silver (blue line, left axis) between 1975 and 2015.The gold to silver ratio juxtaposed with the price of silver and price of gold

As of September 26, 2016, the gold-to-silver ratio was approximately 68. That means that, at current gold and silver prices, it would take about 68 ounces of silver to buy 1 ounce of gold.

How is the gold-to-silver ratio used by precious metals buyers?

When you understand the gold-silver ratio, you can use it to help guide you in identifying when might be the right time to buy gold or silver, given your precious metals portfolio goals.

The ratio “lends valuable guidance to ascertain whether one metal is over- or undervalued with respect to the other,” writes Certified Professional Geologist Michael Fulp on Kitco. “My fundamental idea is to buy silver during instances of very high ratios,” he says. Like many precious metals holders, Fulp strives to maintain a percentage of his net worth in physical bullion, “mostly in gold but always a portion in platinum and silver.”

The gold-silver ratio has remained under 80 over the last 60 days according to Kitco's Gold Silver Ratio Charts, and this could be an example of a noteworthy observation for interested buyers. The last three times the ratio fell below 80, writes Bloomberg, “silver outperformed gold by 60 to 302 percentage points in the next two or three years.”

1 oz Silver American Eagle Coin, front“We believe silver prices may remain well bid…into 2017,” said HSBC via Kitco, and “we base this on solid fundamentals, as mine supply is likely to contract while industrial and jewelry demand should increase. Tighter supply is a key factor in our mildly bullish outlook for silver.” Given the outlook for silver, can you afford to wait any longer? Diversify your precious metals portfolio with the 1 oz. Silver American Eagle, an ideal choice for discerning wealth holders. Secure your silver purchase today by calling 1-844-307-1589.

How is the gold-to-silver ratio used elsewhere?

The gold-silver ratio is also used as a sort of “Wall Street Rorschach test” to determine the potential direction of the equity market, reports CNBC, though how the ratio is interpreted remains subjective.

Those who veer towards being more “bearish,” like Larry McDonald, Founder of the Bear Traps Report, tend to use the ratio in one way, while those who tend to be more “bullish,” use it otherwise. McDonald views the ratio as a “real sign of speculation” and “one of the things we look at in terms of systematic risk and warning signs for the market.” After all, he points out, the gold-silver ratio dropped in 2011 before the market's late-summer dive.

Bullish Oppenheimer technical analyst Ari Wald, on the other hand, sees green where McDonald sees red. With help from analysis dating back to 1998, Wald reports that “when silver outperforms, over the next 12 months the S&P is up on average 11.5 percent; when gold outperforms, the S&P is only up 6.5 percent.” For Wald, silver's outperformance signals that discerning wealth holders are embracing risk again and that “the S&P 500 is setting up for new highs.”

Both perspectives are supported by the fact that silver's industrial uses mean that its performance is more closely tied to global growth, says CNBC, and consequently more highly correlated with stocks than gold.

What does the ratio mean for you?

The gold-to-silver ratio is by no means the “be-all and end-all” solution for timing your precious metals purchases, but it can be a useful tool. That's one reason, among many, that we encourage you to call and speak to one of our professional Account Executives. You'll receive a free, in-depth consultation regarding your overall financial objectives and long-term goals and get help selecting the right silver or gold coins for your portfolio. Call 1-844-307-1589 to connect with your own personal Account Executive today!

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