The Gold/Silver Ratio
The gold/silver ratio has been used for a long time. This ratio tells one how much silver it takes to buy one ounce of gold. For example, if the gold/silver ration is 50:1, then takes 50 ounces of silver to buy one ounce of gold.
One can easily find this ratio published at numerous websites online, or one can simply calculate it themselves. The ratio is easy to figure out-simply take the price of gold, divide it by the price of silver and there you have it-the gold/silver ratio.
What is the Gold/Silver Ratio Used For?
The gold/silver ratio may be a useful tool for determining relative value. For example, when the ratio is very high, then silver may be considered undervalued in comparison to gold. On the other hand, when the ratio is very low, silver may be considered overvalued compared to gold.
This ratio may be used by some short-term traders as well as long-term investors. Long-term investors will use the gold/silver ratio in order to try and acquire more total ounces of gold and silver over time. In other words, by using the relative undervaluation or overvaluation, the precious metals buyer may have a better idea of opportune times to buy silver as opposed to gold, and vice-versa.
Over the last several hundred years, the gold/silver ratio has oscillated between 14 and 100. Today, that ratio sits at about 74. The pre-1900 average for this ratio was 16. Some experts are looking for a return of this ratio to those levels. In order for that to happen, silver prices would have to rise dramatically, gold prices would have to fall dramatically, or there could be a combination of both rising silver and falling gold. Since these markets often tend to move together-at least to a degree-the most likely scenario is a combination of both.
Looking at the last ten years of price information, the gold/silver ratio has fluctuated from the high 30s to over 80. Although the average appears to be on the high side currently, it has been trending higher. Some may consider this an indication that silver is severely undervalued when compared to gold.
It is important to note that ratios can and do change. Although one can certainly make a good case as to why this ratio could potentially return to pre-1900 levels, no one can see the future. Gold is primarily used as an investment vehicle, whereas silver is not only used for investment purposes but also has many industrial applications as well. Therefore, a stronger economy could potentially work in silver’s favor whereas a weaker economy might work in gold’s favor.
The gold/silver ratio can be a useful tool to the long-term precious metals investor. By monitoring trends within this average, and looking for opportunities when the average may be stretched, a long-term investor may be able to stretch his or her investment dollars further. That being said, the gold/silver ratio is constantly changing, and should not be the sole basis for buying decisions.