Gold Silver Ratio: What It is, How It Works, Example

The gold-silver ratio is the oldest continuously tracked exchange rate in history. The primary reason the ratio is followed is that gold and silver prices have such a well-established correlation and have rarely deviated from one another. Throughout history people used both gold and silver as money, minting coins from these two rare and beautiful precious metals. There’s an entire world of investing permutations available to the gold-silver ratio trader. What’s most important is that the investor knows their own trading personality and risk profile.

Many investors today feel the ratio should trade in line with the physical ratio of gold to silver in the earth’s crust. The availability of the the two metals certainly affected their relative prices in the past. We offer up-to-the-minute information on the gold to silver ratio and a look at historical data 24 hours a day. The gold & silver ratio can be used as an indicator to look out for changes in the gold and silver markets. Investors often use this ratio to help them accumulate more gold or silver, selling one to buy the other. ETFs (exchange-traded funds​) are a viable alternative to trading gold and silver assets.

1. The advantage of pool accounts is that the actual metal can be attained whenever the investor desires.
2. It’s worth noting however, among these experts are some of the most ardent advocates for silver investing.
3. The most common method of trading the ratio is that of hedging a long position in one metal with a short position in the other.
4. Consequently, the gold/silver ratio could remain at the current levels, nearing 100, for an indefinite period of time.
5. The gold/silver ratio (GSR) is the current price of an ounce of gold divided by the current price of an ounce of silver.

For those who monitor the gold and silver markets, this can feel satisfying, because it makes roughly gauging the relative value of each fairly simple. However, on further inspection, it can be confusing once you begin to understand their different uses in the wider market. In the end, in order for the ratio to return to its pre-1900 average, the price of silver would need to rise to approximately $105 per ounce. Likewise, if the ratio were to drop to its long-term average, silver prices would rise to about $61 per ounce.

It hit a new all-time high above 125 in March 2020 when the Covid Crisis saw gold investing jump but crushed the silver price, along with most other industrial commodities, as world economies went into lockdown. Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, which could provide another explanation for the pre-1900 gold-to-silver ratio average. Unfortunately, because the gold-to-silver ratio fluctuates so wildly, it can be difficult for novice or small-scale investors to read the signals and make a profit. Conversely, a low ratio tends to favor gold and may be a signal it’s a good time to buy the yellow metal. Many large-scale, experienced investors may trade their silver for gold as the ratio drops.

Gold Silver Ratio

Before the adoption of the fiat currency system, national currencies were often backed by gold or silver. This meant the gold/silver ratio was far more stable in the past than it is today. Indeed, canadian forex brokers it would often be fixed at specified exchange rates relative to units of national currency. These exchange rates would change based on the perceived economic strength of the nation in question.

Gold/silver ratio chart

However, monetary economic theories state that when governments inject large amount of additional money into the economy, it is very unlikely that one dollar would still buy the same amount of gold. Investors who believe that fiat currencies cannot increase their purchasing power of gold and that the gold/silver ratio tends to revert to its mean can calculate the value of silver based on the price of gold. Effectively, the gold-silver ratio represents the number of ounces of silver it takes to buy a single ounce of gold.

These fractions provide accurate rational approximations of the silver ratio, analogous to the approximation of the golden ratio by ratios of consecutive Fibonacci numbers. Some experts predict the gold-to-silver ratio will return to its long-term, pre-1900 average alvexo review of 16 to 1. It’s worth noting however, among these experts are some of the most ardent advocates for silver investing. In this case, the investor could continue to add to their silver holdings and wait for a contraction in the ratio, but nothing is certain.

The Importance of the Gold-Silver Ratio for Investors

For the hard-asset investor concerned with the ongoing value of their nation’s fiat currency, the gold-silver ratio trade offers the security of knowing, at the very least, that they always possess the metal. To illustrate the gold/silver ratio, consider a scenario in which gold is trading at $1,500 per ounce and silver is trading at $15 per ounce. The gold/silver axitrader review ratio would be 100, because it would take 100 ounces of silver to purchase 1 ounce of gold. In 1913, the Federal Reserve was required to hold gold equal to 40 percent of the value of the currency it had issued. A significant change occurred in 1933, when President Franklin D. Roosevelt suspended the gold standard to stem redemptions of gold from the Fed.

What Is the Current Gold-Silver Ratio?

You can buy and hold physical gold and silver for long-term investment purposes, but it is very difficult and expensive to trade in and out of these metals in this way. Trading the gold-silver ratio is an activity primarily undertaken by hard-asset enthusiasts often called gold bugs. Because the trade is predicated on accumulating greater quantities of metal rather than increasing dollar-value profits. Whilst we see silver prices moving up and down with economic events happening around the world, some of this volatility is also due to it not being bought and sold as much as gold bullion. It is perceived to be of less value, so the market is significantly smaller, making any sudden changes in circumstances have even more impact.