What is the Gold to Silver Ratio?

The gold to silver ratio is exactly what it sounds like – it is the ratio of the price of a troy ounce of gold against the price of a troy ounce of silver.

Now, this ratio is not stable, as it fluctuates according to market conditions, and the two prices are not necessarily related to one another. Although both generally trend upwards, spikes in either the spot price for gold or the spot price for silver can radically change the math.

In turn, the spot prices for both metals are determined by the interaction of their supplies and demands. The gold/silver ratio peaked in 2020, when the COVID-19 pandemic caused a massive drop in the industrial demand for silver and a moderate increase in the demand for gold. At one point, the ratio rose to more than 125:1.

However, the burning question is why should precious metals investors monitor the gold/silver ratio.

How to Calculate the Gold-to-Silver Ratio

The math behind the gold to silver ratio is quite simple. To find the gold/silver ratio, you simply divide the price of an ounce of gold by the price of an ounce of silver. The resulting number is merely a reduction of the fraction down, in essence, to the multiples of silver that 1 ounce of gold would cost.

If that’s a bit too opaque, consider the following example:

At the time of this writing, the price of gold is hovering around $2650 an ounce. The silver price is roughly $31.50.

So, to find the current gold-to-silver ratio, we divide 2650/31.5. The resulting answer – about 84.13 – means that an ounce of gold is worth just over 84 times the value of an ounce of silver.

Please note that we did not attempt to use exact numbers for either the spot prices or the ratio itself. While precision is possible when you do this calculation, it is mostly unnecessary, as it is very unlikely that the decimal answer would represent a decision point for us.

Why you should care about the gold-to-silver ratio

Now that we know how to calculate the gold/silver ratio, we should discuss its meaning.

The first thing to know is the average range of the gold-to-silver ratio in the recent past. We need to know the average as a baseline figure.

We want to look at a range, rather than a single number, because there is too much fluctuation in the ratio to make a single average ratio worth anything. It’s better to understand the current ratio in the context of the general range at that time.

So, since 2000, the gold/silver ratio has fluctuated between a high of 120:1 and a low of roughly 30:1. In general, though, the ratio has floated between 50:1 and 90:1 during the period.

As an investor, a higher (approaching or exceeding the upper limits of the average range) ratio could mean one of two things. Either the price of gold is inflated, or the price of silver is too low. So, you could either buy silver, sell or short gold, or both.

When the ratio is lower, the implications are the exact opposite. In that case, it makes sense to buy gold and be less likely to invest in silver. A low ratio doesn’t mean that silver is inflated, per se, but it likely means that the yellow stuff is a good buy.

Unfortunately, timing the gold/silver ratio is more difficult than you’d think. As you start to use it, you may be surprised at how often it changes.

How Often Does the Ratio Fluctuate?

The gold/silver ratio is always in motion. We are completely certain that our numbers in the section above have already changed by the time you read them.

The reasons for the constant fluctuations are varied, though. So, let’s discuss the various factors that might influence the gold/silver ratio.

• Daily movement – The two spot prices move throughout each trading day as traders buy and sell, and the ratio changes with them.
• Short-term changes – The spot price of one or the other moves a bit more significantly due to a steady increase or decrease in demand, such as silver’s rising demand from the solar panel industry.
• Increased volatility – Unstable economic times can lead to prices that move more erratically than usual. Although silver has been more prone to volatility, both metals have experienced some significant price instability at various times.
• Historical changes – If the market for each metal undergoes a systemic and permanent change, it can have dramatic effects on the gold/silver ratio. For instance, the government’s release of the silver market in the 1960s and 1970s changed the market for silver forever, as it now fluctuated more appropriately to its demand.
• Market disruptions – We already discussed an example of this type of event – the COVID-19 pandemic. Any kind of massive geopolitical event, such as war or worldwide contagion, can cause a significant disruption to the entire market itself, and it can drag the spot prices along with it.

Historical Events Influencing the Gold-Silver Ratio

There has been a gold-silver ratio in the US for as long as there has been American currency. In fact, the very first law that created the US Mint – the Coinage Act of 1792 – codified the price relationship between gold and silver at 15:1.

However, even though the law set the ratio in stone, the discovery of gold and silver in the 19th century effected unavoidable changes to the ratio. At various times, the relationship varied wildly, as the addition of new supply or increasing demand as supply waned created a more unstable set of data points.

Another historical element that affected the gold-silver ratio was the manipulation of the prices for one or both metals by various governments. For instance, the Gold Act of 1900, which officially put the US on the gold standard, set the price of gold at $20.67 an ounce. That rate lasted until 1933, when President Roosevelt’s gold program devalued the dollar and made gold worth $35 an ounce.

However, as mentioned, the price of gold or silver doesn’t always conform to the law, and neither does the gold/silver ratio. In fact, the ratio was quite volatile during the 30s and 40s, with several spikes over 90:1 during the period. Overall, the gold/silver ratio in the US during the 20th century was around 47:1, a far cry from the original statutory ratio of 15:1.

Conclusion

The notion of the gold to silver ratio is a simple one. It’s just the relationship between the spot prices of the two metals. For that matter, it could easily be the silver to gold ratio, but it’s easier not to deal with decimals all the time.

This relationship can reveal crucial information about the “correctness,” for lack of a better term, of the prices. A high ratio could signal you to buy silver, while a lower one might indicate that gold purchases are prudent.

However, no single indicator should be enough for you to make a move. Be aware that these prices and their ratio can fluctuate wildly and seemingly without warning.

Instead, the best thing to do is to let the ratio push you in a certain direction, but let that push spur you to more research and study, not immediate action.