Metals Notes

The Gold-to-Silver Ratio: Definition and History


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For many investors, the gold-to-silver ratio is one of many indicators used to determine the right (or wrong) time to buy or sell their precious metals. Other factors… including economic uncertainty, inflation concerns, fiat currencies and government debt have encouraged millions to invest in gold and silver. Yet to many the gold-to-silver ratio is a vague elusive mystery.

The basic definition of the gold-to-silver ratio is the amount of fine silver (in troy ounces) it takes to purchase one troy ounce of pure gold. Simply take the price of gold, divide it by the price of silver, and the result is the gold-to-silver ratio. As I write this the gold-to-silver ratio stands at approximately 74 to 1. That means it would take 74 ounces of pure silver to buy an ounce of pure gold.

Investors who trade gold and silver bullion and other precious metals closely monitor the gold-to-silver ratio as a signal to either buy or sell a particular metal. When the ratio is high the general consensus is that silver is favored because relative to the ratio silver is inexpensive. The current ratio of 74:1 is higher than its historical average suggesting silver may offer greater profit potential than gold at this point in time. Conversely, a low ratio obviously favors gold and may be a signal to buy the yellow metal. Many experienced investors may trade gold for silver or vice versa based on the gold-to-silver ratio.

The history of the gold-to-silver ratio is an interesting one. Since 1687, as far back as records reach, the ratio vacillated in a range of approximately 14:1 to 100:1. For much of the 19th and early 20th centuries, the ratio hovered around 16:1 as many countries were using gold or silver backed paper currencies. The United States and France were among several countries backing their currency with gold and both countries assigned statutory limits as to what the ratio could be. Also, the U.S. Geological Survey estimates there is 17.5 times more silver in the Earth’s crust than gold, which may substantiate the long held 16:1 ratio to some degree. Throughout much of the late 20th century and so far this century the ratio has averaged about 50:1 but has fluctuated wildly at times. Those experts who predict a return to the historical 16:1 gold-to-silver ratio would currently be looking at either a rise to $75.00 an ounce silver or a drop to $260.00 an ounce gold. Which price seems more probable to you?

gold-silver-coins-bars-webIn summation, the gold-to-silver price ratio can be one of the several valuable tools used to determine the optimum time to buy gold and silver. With patience, research and a long-term perspective, you may choose to buy silver when the ratio is high as it is now…buying larger quantities with fewer dollars.