Forex Trading

Gold Silver Ratio: Chart, Calculation & Strategy

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 ratio would be 100, because it would take 100 ounces of silver to purchase 1 ounce of gold. The gold-silver ratio is calculated by dividing the current price of gold by the current price of silver.

  1. Likewise, if the ratio were to drop to its long-term average, silver prices would rise to about $61 per ounce.
  2. It’s a simple numerical calculation that shows how many multiples gold is trading relative to the price of silver, a common indicator used by precious metals investors worldwide.
  3. Many precious metals investors will keep track not just of the gold price or the silver price, but also of the ratio between those two prices.
  4. The gold-silver ratio measures the amount of silver it takes to equal an ounce of gold.

Some investors may prefer to invest in gold, which has seen centuries of use as a hedge against inflation and financial crisis. Others may prefer to invest in silver, which has a greater potential for upside growth. For example, if a trader owns one ounce of gold and the ratio rises to 100, the trader will exchange one ounce of gold for 100 ounces of silver. Subsequently, if the ratio drops to an opposite extreme of 50, the trader will sell their 100 ounces of silver for two ounces of gold. This method allows traders to accumulate metal, while seeking high and low ratio numbers in order to increase holdings. Trading the gold-silver ratio is an activity mainly carried out by gold and precious metals traders, who use the gold/silver ratio to modify their holdings when the ratio fluctuates at historical extremes.

Exchange-Traded Funds (ETFs)

But the era of the fixed ratio ended in the 20th century as nations moved away from the bimetallic currency standard and, eventually, off the gold standard entirely. Since then, the prices of gold and silver have traded independently of one another in the free market. With investors being able to invest in both gold and silver through a precious metals IRA, they don’t have to worry about setting up multiple investment vehicles. Investors can roll over existing retirement assets from 401(k), 403(b), TSP, and similar retirement accounts into a gold IRA or silver IRA relatively easily.

Trading the Gold-Silver Ratio

Trading gold and silver ETFs lets investors take advantage of price movements in a simple way. 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 hedge fund trading strategies change occurred in 1933, when President Franklin D. Roosevelt suspended the gold standard to stem redemptions of gold from the Fed. This, along with other measures, weakened the link between the dollar’s value and gold.

Geologists today believe silver is around 19 times more abundant than gold in the earth’s crust, but modern silver mine output worldwide is only 8 times greater than gold’s by weight each year. Such heavy speculation in silver contrasts with its solid and steady demand from the industrial sector. Almost 60% of silver’s annual demand now comes for productive uses, versus barely 10% for gold. The sequence ,
of power fractional parts, where is the fractional part,
is equidistributed for almost all
real numbers ,
with the silver ratio being one exception.

The gold-silver ratio compares how much silver is required to purchase an amount of gold. Only the most experienced investors make profits using a short-term view, and even they suffer errors in judgment. At the time this was written, the gold-to-silver ratio stood at approximately 50 to 1.

How Is the Gold-Silver Ratio Calculated?

Investors with a longer time horizon can afford to be a little more relaxed, as they can adjust their holdings of gold and silver based on which way the gold silver ratio moves. Still other investors may want to invest in both gold and silver but are unsure of how much of their portfolio they should allocate to each metal. That’s where the gold silver ratio can play a role in helping investors determine whether to invest in gold, silver, or both metals.

A value above 100 would indicate higher volatility and uncertainty in the markets, while a value below 100 usually signals stability and steady economic  growth. The gold-silver refers to the ration between the value of gold relative to the value of silver. The ratio essentially takes into account how many ounces of silver are necessary to purchase an ounce of gold. Likewise, the three times the gold / silver ratio has fallen below 20 in the past, it has marked
a period when gold was relatively inexpensive compared to silver. In recent decades, the gold to silver ratio has varied anywhere from around 30 to 1 to over 90 to 1. Negotiating the gold/silver ratio makes sense for those concerned with devaluation, deflation and monetary replacement.

Those investors would seek to invest in more silver or convert their gold investments into silver. For experienced investors, the gold-to-silver ratio is one of many indicators used to determine the right (and wrong) time to buy or sell their precious metals. During the 19th century, the United States was one of many countries that adopted a bimetallic standard monetary system, where the value of a country’s monetary unit was established by the mint ratio.

In 1915, you could have traded 40.63 ounces of silver in exchange for one single ounce of gold. In 1940, near the beginning of World War II, gold soared as a safe haven asset and the ratio was 96.71 to 1. Investors who trade gold bullion, silver bullion and other precious metals scrutinize the gold-to-silver ratio as a signal for the right time to buy or sell a particular metal.

But if the silver price rises to $20 per ounce while gold remains unchanged, the gold silver ratio is now 75 to 1. 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. For example, trading some ETFs, such as iShares Silver Trust (SLV) and SPDR Gold Shares (GLD), generates a similar effect when trading off the gold-silver ratio.

What is the gold/silver ratio?

For example, you can purchase puts on gold and calls on silver when the ratio is high, and the opposite when the ratio is low. The bet is that the spread will diminish with time in the high-ratio climate and increase in the low-ratio climate. Options, however, permit the investor to put up less cash and still enjoy the benefits of leverage with limited risk. Effectively, the gold-silver ratio represents the number of ounces of silver it takes to buy a single ounce of gold.

A Historical Guide to the Gold-Silver Ratio

Despite not having a fixed ratio, the gold-silver ratio is still a popular tool for precious metals traders. They can, and still do, use it to hedge their bets in both metals—taking a long position in one while keeping a short position in the other metal. When the ratio is higher and investors believe it will drop along with the price of gold compared to silver, they may decide to buy silver and take a short position in the same amount of gold. The gold-silver ratio has fluctuated in modern times and never remains the same. That’s mainly due to the fact that the prices of these precious metals experience wild swings on a regular, daily basis. But before the 20th century, governments set the ratio as part of their monetary stability policies.

While there are countless websites providing the current ratio, it’s relatively painless to calculate on your own. As of December 2020, the gold/silver ratio was about 75, down from 114 in April 2020. Options have a time decay component that will erode any real gains made on the trade as time passes and the options contracts approach expiration. Therefore, it could be best to use long-dated options or LEAPS to offset this risk. One estimate in the early 2000s said the above-ground stockpile of gold could meet more than 6,600 days of demand. For silver that number was below 260, more in line with coffee, cocoa and other consumed commodities.

Many observers view this event as the moment when the U.S. dollar became a de-facto fiat currency, after which the role of governments in setting the price of gold and silver steadily declined. The difficulty with the trade is correctly identifying the extreme relative valuations between the metals. For example, if the ratio hits 100 and an investor sells gold for silver, and the ratio continues to expand—hovering for the next five years between 120 and 150—then the investor is stuck. A new trading precedent has apparently been set, and to trade back into gold during that period would mean a contraction in the investor’s metal holdings. That’s because gold and silver are valued daily by market forces, but this has not always been the case.