Gold/silver ratio explained

One way to determine when it is a good time to invest in gold or silver is to keep an eye on the gold/silver ratio. This is a ratio that moves and indicates the relative value of gold and silver. We will delve deeper into what the gold/silver ratio is, its developments and how it can be used to determine when to invest in gold or silver.
 

What is the gold/silver ratio?

The gold/silver ratio shows how many troy ounces of silver are needed to purchase one troy ounce of gold. This ratio is usually expressed as 82:1. At the time of writing, 82 troy ounces of silver are worth the same as 1 troy ounce of gold.
 
The value of precious metals is not proportional to their scarcity. Although gold is much more expensive than silver, it is only 8 times as scarce. This means that for the annual silver production of 1.7 million tons, only 209,000 tons of gold are mined. The earth's crust itself would contain about 16 times more silver than gold. Silver is therefore severely undervalued.
 

Development of gold/silver ratio

Historically, the gold/silver ratio was primarily used as a practical exchange rate because gold and silver were used as currency. This created a bimetallic standard. The gold/silver ratio was first established by the Romans at 12:1. Over the centuries, the ratio increased to 16:1 and later to 20:1.
 
It was not until the 19th century that the bimetallic standard was abandoned in favour of the gold standard. As a result, silver lost its function as a means of payment and its price fell in relation to the gold price. In the last ten years, the gold/silver ratio fluctuated between 60:1 and 120:1.
 

Causes of Gold/Silver Ratio Fluctuations

Fluctuations in the gold/silver ratio have been fairly common since the switch to the gold standard. Gold is seen as the most stable investment in times of economic uncertainty and is mainly used by investors, the jewelry industry and banks. Silver, on the other hand, has many industrial applications which makes the demand for silver different.
 
Geopolitical circumstances also affect the gold/silver ratio. During the COVID-19 pandemic, demand for silver dropped to an all-time low and the gold/silver ratio was 120:1. However, there have also been years (1968, 1980 and 2011) when silver outperformed gold.
 
Gold does best in times of economic uncertainty while silver rises in value when there is stability. The more stable the economy, the higher the demand for silver from industry.
 

Gold/Silver Ratio in Long Term Investing

The gold/silver ratio can be used to give an indication of the current climate of the precious metals market and which cycles it follows. High ratios indicate undervalued silver while low ratios indicate undervalued gold.
 

Using the Gold/Silver Ratio When Buying and Selling Gold and Silver

When the gold/silver ratio rises above 80:1, this is a good entry point for investors to buy silver. A ratio above 80:1 indicates that silver is highly undervalued and that the ratio will fall again at some point. In addition, a high ratio indicates the bottom price of silver.
 
If the ratio is lower, it may be an indication for investors to choose to invest more in gold.