The Gold/Silver Ratio: An Essential Indicator for Investing in Precious Metals
- ccancino3
- Mar 20
- 4 min read
Updated: Mar 31
How many ounces of silver do you need to buy one ounce of gold? For centuries, the Gold/Silver ratio has been used as an indicator to make investment decisions. Learn how this financial ratio works and the factors that influence its behavior.
The Gold/Silver ratio is a measure that compares the prices of these two precious metals. In order to calculate it, simply divide the current price of a gold ounce by the price of a silver ounce. For example, if gold is trading at $2,600 USD per ounce and silver at $31 USD, the Gold/Silver ratio would be 83:1, which means that 83 ounces of silver are needed to acquire an ounce of gold.
From its origins to the Current Markets
Although there is 19 times more silver than gold in the Earth's crust, today, only 9 times more silver is mined than gold. However, the relationship between the price of both metals was not always determined by nature, nor by the market, but it was established by law.
In Ancient Egypt, Pharaoh Menes set the Gold/Silver ratio in 2.5:1. For centuries, silver and gold were used as coins, with the Gold/Silver ratio stipulated by governments seeking monetary stability. That is why, from 1260 to 1870, a period of more than 600 years, the gold/silver ratio remained virtually constant at 15:1. Since then, silver’s monetary role has been decreasing and its role as an industrial metal has been increasing.
Currently, the Gold/Silver ratio fluctuates daily due to economic, political and market factors. Investors use it as a guide to decide when it is the best moment to buy or sell each metal and increase the profitability of their holdings.
Three factors that Deternal the Gold/Silver ratio
1. Supply and Demand
The availability of gold and silver plays a crucial role in the Gold/Silver ratio. In nature, gold is a more scarce element and expensive to extract, whereas silver is more abundant and plays a significant role in industries such as electronics and renewable energy. This difference in their industrial uses and the difficulty of extraction of each one, influence the relationship between both metals.
2. Economic Forces
Inflation, interest rates and the devaluation of currencies are factors that influence both the price of gold and the price of silver. In times of economic uncertainty, gold is often seen as a safe haven, increasing its price and raising the Gold/Silver ratio. On the other hand, silver tends to follow gold, but its greater volatility can generate significant fluctuations.
3. Historical and Geopolitical Influences
The historical average of the Gold/Silver ratio stands at around 55:1 in the modern era. However, extreme moments have been recorded: In 1979, during the world energy crisis, the Gold/Silver ratio stood at 14:1, which indicated a strong silver’s appreciation. In contrast, in 2020, the Gold/Silver ratio reached an all-time high of 125:1, driven by the sudden rise in the price of an ounce of gold in the face of the uncertainty caused by the COVID-19 pandemic.
During the last three years, the Gold/Silver ratio has remained at high levels, at around 85:1, reflecting the investors' preference for gold in the face of economic uncertainty and geopolitics.
¿How can the Gold/Silver ratio be used as an Investment Strategy?
The Gold/Silver ratio is an essential indicator for investing in these precious metals. Not only does work to interpret the market, but also to make strategic investment decisions. For example, if the Gold/Silver ratio is high (above 90:1), it could be a good time to invest in silver, as it would be considered undervalued compared to the price of gold. On the other hand, when the Gold/Silver ratio falls below 70:1, it is possible that silver is overvalued and it is better to sell it and invest in gold.
You can also take advantage of the Gold/Silver ratio to carry out direct exchanges between these precious metals. If, for example, you have an ounce of gold and the Gold/Silver ratio goes up to 100, you could sell it in exchange for 100 ounces of silver. Later, if the Gold/Silver ratio stands at 50, you could exchange the 100 ounces of silver for two of gold, thus doubling your initial holdings.
Monitoring the Gold/Silver ratio offers an opportunity to diversify your portfolio and optimize its profitability in a changing market. The knowledge and the strategic use of this relationship can make a difference in the search for long-term financial stability.
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