The gold-silver ratio is the price of the silver and gold relative to each other. Initially, the gold-silver price relationship was fixed at a certain ratio but over time it began to fluctuate as information traveled faster and external variables weighed on their value.
It’s a measurement that’s been around for thousands of years. Understanding how the two assets’ price relationship allows investors, governments, and manufacturers to compare and trade gold and silver in real-time.
What Is the Gold-Silver Ratio?
The Gold-to-Silver Ratio, also known as the Silver-to-Gold Ratio, or “Mint Ratio,” is a a metric that indicates the amount of silver required to buy an ounce of gold. For example, if the silver-gold ratio is 40:1, then it would take 40 ounces of silver to exchange for one ounce of gold. This ratio fluctuates daily as the spot price of an ounce of gold and silver changes. This ratio is used by investors determining whether and how they want to invest in precious metals.
How Is the Gold-Silver Ratio Calculated?
Investors calculate the gold-silver ratio by dividing one ounce of gold by one ounce of silver, or how many ounces of silver equal one ounce of gold. For example, if one ounce of silver is $20 and one ounce of gold is $1,600, then the silver-gold ratio would be 80:1.
Unlike other physical items, precious metals are weighed by Troy Ounce , an historic unit of measurement dating back to the Middle Ages equaling roughly 31.1 grams. By comparison, the standard ounce weighs about 28.35 grams. The price of one Troy Ounce of gold and silver fluctuates daily based on the spot price , or current price at which the metal is trading.
Whereas most precious metals and commodities have futures contracts traded on the market where traders can trade gold and silver based on later-dated future prices, the spot price uses real-time price data. Premiums, or additional seller fees added to the price by metal retailers and merchants do not factor into the spot price or the gold-silver ratio.
What Is the Historical Gold-Silver Ratio?
In modern times, the gold-silver ratio fluctuates daily. Before the 20th century, however, governments set the ratio between the two metals as part of their monetary policy, with many relying on a bimetallic standard. The U.S government set a gold-silver ratio of 15:1 with the Coinage Act of 1792, and adjusted the standard to 16:1 in 1834.
During the 20th century, nations started to migrate away from the bi-metallic currency standard and for some off the gold standard entirely to fiat currencies. This created more volatility in the metal prices.
Since then, gold and silver prices have traded independently of one another as alternative assets in the free market, resulting in a fluctuating gold/silver ratio.
When the United States abandoned the gold standard in 1971, the gold/silver ratio was 20.54:1. In 1985, it reached 51.68:1 and hasn’t fallen below that level since. It has climbed steadily upward since 2011, reaching an average 86.14 in 2020.
Within each year, however, there is significant day-to-day volatility. The ratio hit a record high of 124:1 in March 2020.
Why Does the Gold-to-Silver Ratio Matter?
The gold/silver ratio can be useful to both traders and consumers of precious metals.
Investors focused on commodities or hard assets keep a close eye on the gold/silver ratio. When the gold/silver ratio is higher than expected, this signals to analysts and traders that silver’s price may be undervalued relative to gold. Conversely, an extremely low number could indicate that gold is undervalued.
Movement in the ratio may also shed light on the current demand or market sentiment toward either metal. A tightening of the ratio may indicate higher silver demand or lower gold demand. Investors in precious metals may compare this ratio to the current supply and demand of each asset to determine whether the fundamentals warrant the price change or if the ratio reflects heightened price speculation.
For manufacturers purchasing precious metals such as gold and silver en masse to produce electronics and various consumer goods, the gold-silver ratio may help determine whether or not it’s a good time to buy more metal quantities or buy a futures contract that could offer a more favorable price. This is a common strategy among various industries that rely heavily on imported materials to produce goods. Companies often hire in-house traders, analysts, or outside consultants to determine price forecasts of required commodities and will buy when the market is favorable and hedge when the outlook is less optimistic.
Can You Trade the Gold/Silver Ratio?
The gold-silver ratio is used in investing and trading to determine when one metal is undervalued or overvalued and thus a good value investment. However, like any other security, commodities carry some risks for investors.
Sometimes precious metals are extremely volatile and experience wild price swings, and sometimes gold and silver experience long periods of minimal price movement and volatility compared to other types of investments such as equities, commodities, and cryptocurrency. In fact many investors consider precious metals a store of wealth and allocate to it as part of their investors’ long-term investment portfolios.
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Measuring one asset against another is one way to determine an asset’s value, and Understanding the ratio, and the direction it’s moving, can help you make decisions about any precious metals allocations within your portfolio.
SoFi Invest brokerage platform can help you gain exposure to precious metals like gold and silver. You can use the platform to purchase exchange-traded funds (ETFs) that invest in specific commodities, or buy mining companies that produce such metals.
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