What is the gold to silver ratio?
The gold to silver ratio is a way to track the relative values of two precious metals, gold and silver.
In very simple terms, the gold to silver ratio is basically how many one ounce silver coins or bars does it take to purchase a one ounce gold coin or bar.
The current ratio (June 2020), is around 95 to 1. That means it takes 95 ounces of silver to buy 1 ounce of gold. In historical terms this ratio is actually a very high ratio. A ratio of 20 to 1 for example, would be considered a very narrow ratio.
Over the last 20 years or so, the gold to silver ratio has averaged around 60 to 1. Again, meaning it would take 60 ounces of silver to buy 1 ounce of gold.
The gold silver ratio actually recently peaked to an all-time high, over 115 to 1 at the end of March 2020, which would be the highest level in the ratios history.
If you go back further in time, then the gold silver ratio has actually been much narrower than it is today. Gold and silver have been used as monetary value for decades, so you can track the average gold to silver ratio right back to the late 1600s, which is pretty much how far back any reliable records go. Prior to the 1900s the gold silver ratio was fairly stable, ranging between 12 to 1 and 15 to 1.
This is also inline with geological surveys which suggest there is around 17.5 times more silver in the earth’s crust than there is gold.
You can argue that prior to the 1900s, when gold and silver were used as physical money in some form or another to buy goods and services, there was a natural narrow ratio.
Through the 20th century (as silver was demonetised), the gold silver ratio has averaged around 47 to 1, but there has been some wild fluctuations during the time because of various reasons.
Examples; such as President Roosevelt, who set the price of gold at $35 an ounce in 1934: the Bretton Woods Agreement of 1944, which pegged foreign exchange rates to the price of gold: and then the abandonment of the gold standard by Richard Nixon in 1971.
All very interesting, but what does it mean and why should I care?
Gold and silver investors who trade these precious metals can essentially use the gold silver ratio as a sign as to when to buy or sell either gold or silver.
For example, if the current ratio is 95 to 1, then that might be a clear sign that the silver price, or the value of silver, is considered cheap or of low value compared to gold. In comparison, when there is a narrow ratio of say 25 to 1, then that might be a sign to trade your silver into gold.
As a savvy investor, you can essentially play the gold silver ratio to your advantage by trading back and forth between gold and silver, making accumulating gold and silver much more effective and profitable.
The gold silver ratio can also be used as a powerful trading tool that can help to identify buying or selling opportunities in the precious metals sector. Using the gold silver ratio is common place for more seasoned traders, hedging a long position in one metal with a short position in the other.
Because the gold silver ratio can fluctuate widely, it can be quite difficult for small-scale or novice investors to read these signs clearly and make a quick profit.
Therefore, for smaller investors, it is best to try and buy small quantities of either gold and silver when it is reasonably obvious that the ratio is high or low. This will help the decision process of which precious metal to buy or trade. This is a more long-term strategy and can assist you to simply diversify and build your wealth through gold and silver over time.
Obviously the gold silver ratio is only one of many tools, guides and indicators of when the optimum time is to buy or sell either gold or silver bullion. You wouldn’t necessarily use the gold silver ratio as your only tool when it comes your decision-making on investing in gold/silver, but it is a very useful tool to be aware of.
Source: www.goldbroker.com Goldbroker all rights reserved.
Read the ratio.
It is impossible to predict the future. However, if you look at the ratio now (June 2020), it is hard to ignore that the ratio is particularly high relative to the past decades.
Many precious metal experts consider a ratio of over 80 to 1 as a strong signal that silver is undervalued relative to gold. You only have to look back through the decades to see that a ratio over 80 to 1 doesn’t last for long.
Investors must be aware and factor in other things when looking at the gold silver ratio. Does it necessarily mean the silver prices are set to head higher? Or does it mean gold prices will decline? The gold price might fluctuate differently to the silver price due to different supply and demand dynamics. Other influences, such as mining supply, logistics, recent closures, industrial demand and other factors are at play, so it is not always possible to know exactly where gold or silver prices are heading, and how that relates to a gold silver ratio strategy.
With all this in mind, if you are looking just at the gold silver ratio, then it is reasonable to surmise that the current ratio (June 2020) is historically much higher than average.
With your own research, patience and keeping to a long term plan, you can use the gold silver ratio to your advantage.
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