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What is The Gold-Silver Ratio?

Thursday, May 6, 2021

In this guide, you will learn what the gold-silver ratio is, how to calculate it, and how you can use it to identify investing opportunities.

The gold-silver ratio, also known as the mint ratio, is a metric used to compare the price of gold to the price of silver. It shows you how many ounces of silver you need to buy one ounce of gold.

Traders and investors frequently use the ratio because over the years there have been normal ranges for the ratio, meaning there may be buying or selling opportunities when the ratio is outside the typical range.

Figuring out the ratio is simple. We just compare the price of gold to silver. For example, if the price of gold is £500 and the price of silver is £10, then the ratio is 50:1, or if gold is £1000 and silver is £50, then the ratio is 20:1

History of the Gold/Silver Ratio

In modern times, the gold to silver ratio constantly changes. This is because it is based on the prices of gold and silver, two metals that are used in industry and jewellery, and they are both regularly traded throughout the economic cycle. You can view the latest silver price chart or take a look at the live gold price.

Changes in the ratio also happen because of gold and silver price swings. These swings have become more common over the decades. However, in the past, the gold-silver price ratio was very consistent.

Part of the stability came from governments, which set a particular ratio as part of their economic policies. The range was between 12:1 and 15:1. This range even goes as far back as Roman times, when the typical ratio was 12:1.

In the 19th century, many countries used a bi-metallic monetary system. In this system, a country’s monetary unit was based on the gold/silver ratio. However, by the end of the 20th century, countries left the gold standard, and the prices of gold and silver traded independently in the free market.

A short history of the gold-silver ratio:

Period Ratio  
Roman Empire 12:1 The Roman Empire first officially set the ratio at 12:1.
1492-1834 15:1 The ratio stayed around 15:1 in Europe
1792-1834 15:1 The U.S. had a bimetallic standard of 15:1
1834-1862   US Congress changed its official ratio to 16.3
1980 16:1 During 1980, the ratio briefly hit historic norms.
1991 100:1 Silver hit historic lows, pushing the ratio up 100:1
2020 114:1 Last year, the ratio peaked at 114:1

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What Should The Gold-Silver Ratio Be?

Some argue that the past gold-silver ratios give us a rough estimate of what the ratio should be today. Since the time of the Egyptians, and until only a few decades ago, the ratio has ranged between 12:1 and 16:1. So there are thousands of years precedent to expect a ratio at or close to this range. Today, with gold priced at $1771 per ounce and silver priced at $26 per ounce, the current ratio is roughly 68:1, which is lower than last year’s peak, but still significantly higher than the historic norm.

An alternative way of deciding on a ratio for gold and silver is based on the actual quantity of gold and silver in the Earth’s crust. According to experts, there is 16 times more silver than gold. However, some believe the ratio should be even lower because silver is produced at a much higher rate than gold, leading to a faster depletion of the resource.

Many question why the ratio is so high in comparison to historical norms and even in comparison to the quantity of both metals in the Earth. Why has the ratio changed so much and so rapidly since the 1970s? Has global economics changed so drastically in the last four decades?

One major change that happened in the 1970s was the end of the Gold Standard. Until this time, the US Dollar was directly linked to the price of gold. Having currency linked to the gold price meant the government had to follow a certain amount of monetary discipline.

The discipline of the Gold Standard was due to governments needing to be sure they held enough gold in reserve for whenever someone wanted to exchange their currency for gold. If the government printed more money than it held in gold reserves, it risked causing hyperinflation or a financial crisis, shattering confidence in their currency.

Since the 1970s, governments and central banks around the world have been free to manage their monetary policies as they wish without any restrictions imposed by currency-gold links. This is likely the biggest change to take place throughout the history of the gold-silver ratio and is most likely the reason for the radical rise in the ratio and its volatility.

Trading the Gold-Silver Ratio and Investing Opportunities

The gold-silver ratio cannot predict the future, as with any financial metric, but it gives you a good indication of whether gold or silver is overvalued or undervalued. View the price of silver UK or have a look at the gold price today.

Over time, most market averages trace through normal ranges before careening off to extremes. It is during the extremes where opportunities exist, and these are the times to buy or to sell.

What this means is that a high gold-silver ratio could mean that silver is undervalued, and a low ratio could mean gold offers good value. Due to this, some investors buy silver when the ratio is high and buy gold when it is low.

One key strategy of successful bullion investors is accumulation. By switching between buying gold and silver depending on the movement in the ratio, you steadily build up quantities of both metals — and over time value builds in your portfolio.

Interested in Investing in Gold or Silver?

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