If you have been in the gold market for a while, you might have heard of the gold to silver ratio. It is one of the most talked about ratios in the financial market, and for good reasons too.
This ratio is very high and has a knack for breaking its record for all-time highs. The question, however, is why? Why is the gold to silver ratio so high?
Several factors drive up the gold to silver ratio. Economic uncertainty and instability in the markets are one reason. Low-interest rates, dollar weakness, and low treasury yields are other reasons.
While these sound simple on the surface, they are far from it. We will see how these reasons affect the gold and silver ratio and what it means for the investor. But first, let’s define the gold and silver ratio, and look at a bit of history.
What Is The Gold And Silver Ratio?
Let’s start simple and define the gold and silver ratio. This ratio is simply the amount of silver it would take to buy 1 ounce of gold. To calculate the gold-to-silver ratio, you must divide the price of gold by that of silver.
Keeping track of the gold and silver ratio is a great way to check how both metals are doing in relation to one another. It might also be a guide for investment decisions. This definition is the only simple thing about this ratio. It gets a bit more complicated from here.
History Of The Gold And Silver Ratio
The gold and silver ratio has a very long history. It probably started because of the notion that the two precious metals are naturally related. This relationship was based on their use as legal tenders.
Nowadays, the gold and silver ratio keeps fluctuating, but this wasn’t always the case. Before the 20th century, there was a set golden to silver ratio. This set ratio was an attempt by the government to maintain monetary stability.
The Roman empire was the first government to set a gold to silver ratio. They set it at 12:1, meaning it would take 12 ounces of Silver to buy an ounce of gold.
In 1972, the US government affected a coinage act and fixed the gold and silver ratio for the country at 15:1. This was later increased to 16:1 by Congress between 1834 and 1862.
By the 20th century, the era of fixed ratios ended, and the gold and silver ratio became much more volatile than it used to be. Nations slowly began to leave the golden standard, and soon the price of these two metals became independent.
Another important date in the history of the gold and silver ratio was 1991, when the price of silver went to an all-time low, and the ratio was at 100:1.
The ratio would cross this mark again in 2020 when it peaked at 114;1 the highest it has been in more than 100 years. It would fall again, and the ratio has fluctuated between 65 and 95.
What Is The Gold To Silver Ratio At the Moment?
As of August 2022, the gold and silver ratio was 90:1. You would need 90 ounces of silver to buy an ounce of gold.
Although it is not as big as the all-time high in 2020, it is still high. So the question is, why is this ratio this high? Considering that they are precious metals with relatively similar attributes, why is it so expensive to purchase gold with silver?
Why Is The Gold To Silver Ratio So High?
I must say here that the gold to silver ratio is not set. It fluctuates and can change anytime depending on how well both metals are doing. What affects the price of each metal will generally affect the ratio.
Here are some of the reasons why the ratio is so high:
- The demand and use of silver are higher than that of gold, so the price is much lower.
- Silver has a higher industrial usage than gold. This adds to the demand and increases the gold to silver ratio.
- Gold is inert chemically, so it is not affected by the elements. On the other hand, silver slowly corrodes. The implication is that the recycling rate for both metals isn’t the same. More gold than silver returns to the market in a different form, which is another reason this ratio is usually high.
- The supply chain also has an implication on the price of silver. Most of the silver we see today is sourced from mining activities where silver isn’t the major product, affecting the metal’s price elasticity.
- Silver has a very volatile market. While it will take a large amount of money to cause fluctuations in the gold market, the same cannot be said for silver.
- Silver also has a smaller market size than gold, another reason for the high gold to silver ratio.
- The central banks also have a role to play. Over time, central banks have reduced the amount of silver in their treasury while quickly accumulating gold. This had and still has a great impact on the gold to silver ratio.
- Geopolitical and financial issues will drive more economies to seek solace in the stability that gold offers.
- Other factors that affect the gold to silver ratio are low-interest rates and the strength of the dollar. The weaker the dollar, the higher the gold to silver ratio. Also, the fluctuation of interest rates affects the ratio.
- When the interest rate is low, the price of gold goes up more than the price of silver does, thereby increasing the ratio.
Because of these factors, most economies turn to gold as an investment option, but the increased demand for gold has only caused an increase in the gold to silver ratio.
A relatively equal spike did not follow the spike seen in the price of gold in the price of silver, so the ratio keeps increasing.
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What Does This Ratio Mean To Me?
If you pay attention to the gold to silver ratio, you might be able to find a great time to invest in both metals.
Investors use the ratio to understand which metal to hold for a long time and which they should keep in a short position. It is a great way for investors to make a profit. However, it is not certain and requires constant attention to the ratio and the market.
Most experts will tell you that a very high ratio means that silver is undervalued and is thus a great time to buy the metal. They believe that silver has the potential to outpace gold and so an investment in the metal is a good one.
If this happens, the gold to silver ratio might decrease as more and more people buy silver and the price increases.
What Is A Good Gold To Silver Ratio?
I do not believe in a good gold to silver ratio. In fact, experts will tell you that there is no such thing.
The gold to silver ratio is only an indicator. If it is high, you might make a bet and buy Silver because it means the price is low and might increase over time.
However, if this ratio is low, it might be a good time to buy gold because it sells at a more affordable rate.
Does this mean you should stake all your gold and silver investment decisions on this ratio alone? Definitely Not! The gold to silver ratio always fluctuates and making long-term investment decisions based on the ratio alone can be very hard.
It’s also important to understand the risk that follows investment decisions using this ratio. If you buy silver because the ratio is high, you might risk making a loss if the ratio continues to increase. Nothing is ever certain.
I advise seeing the ratio as one factor to consider while making your investment decisions.
Will The Price Of Silver Ever Catch Up To Gold?
The price of silver has shown promise, and it seems to climb faster than gold. However, it is very unlikely that the price of silver will ever catch up with gold.
For one, there is already a great margin between the prices of the two metals. It will be difficult, if not impossible, for silver to cover the gap.
Also, silver has more reserves left to be mined, which means that silver is not as scarce as gold and hence won’t be as expensive anytime soon.
However, the price of silver and gold show signs of increasing is a great reason to invest in both metals.
Conclusion
The gold to silver ratio is a great tool for investors. They have been using it to make investment decisions for a long time.
The ratio at the time of writing this article was 95:1, which is considered on the high side. I have discussed the reasons for this and the implications for the investor.
Using the tool and other factors, you can gain insight into which metal to invest in and when it is best to invest on.
Martin Thomas, the owner of Sutter Gold Mining, is a true gold investment aficionado. With decades of experience and a wealth of knowledge, he is the go-to source for anyone navigating the vast world of precious metals. Martin has dedicated decades of his life to understanding the intricacies of the precious metals market and the best strategies for maximizing returns. His expertise in this field is unmatched, and his commitment to helping others make informed investment decisions is unwavering. With him as your guide, you’ll gain a deeper understanding of the gold market and learn how to make smart investment choices that will benefit you for years. With his guidance and wisdom, you will never have to worry about taking the wrong investment step again.
