What is the gold silver ratio? Why is the gold silver ratio at new highs? In this post you’ll learn:
- What is the Gold Silver Ratio?
- How is the Gold to Silver Ratio Used?
- What is the Ratio Telling Us Now?
- Why is the Gold to Silver Ratio at New Highs?
- What to Do Now?
What is the Gold Silver Ratio?
The gold silver ratio is simply the price of an ounce of silver divided into the price of an ounce of gold. The resulting number shows how many ounces of silver it takes to buy an ounce of gold.
The gold to silver ratio can be helpful in determining whether to buy more gold or more silver at any given time.
To calculate the gold to silver ratio on a given day, take the gold price and divide it by the silver price.
At todays prices that would be 1325.15 (gold) divided by $14.69 (silver) equals a gold to silver ratio of 90.27.
How is the Gold/Silver Ratio Used?
The Gold to Silver ratio (GSR) is used as a method of valuing silver against gold.
It can also be used as a way to determine when it is better to buy silver and when it is better to buy gold. A higher ratio means silver is undervalued compared to gold. Conversely a lower ratio means silver is overvalued compared to gold.
Viewing the gold to silver ratio over time in a chart can be helpful. The chart below shows the 20 year average for the ratio is about 60. Currently it is well above that. Sitting near a 28 year record of around 90.
So What is the Ratio Telling Us Now?
The gold silver ratio is telling us to buy silver over gold currently. With the ratio getting well over 80, silver is very undervalued compared to gold on a historical basis.
The gold silver ratio closed at 90.27 on 11 June 2019. Not since early 1993 has the gold silver ratio been this high. So we are currently at a 26 year high.
However we have seen the ratio as high as 100 back in 1991, so there is always the chance it could go higher yet. Particularly with gold looking like it might be about to break out. If silver continues to stagnate, then a ratio of 100 would not take too long to arrive.
Nonetheless currently silver is very undervalued compared to gold. But both are undervalued compared to dollars. Whether they be US Dollars or NZ Dollars.
People are rushing toward gold and ignoring silver. This is a rare event and likely won’t last.
How to Use the Gold Silver Ratio to Determine Whether to Buy Gold or Silver
A good rule of thumb in determining which metal to buy is shown in the chart below.
Consider buying gold when the ratio gets below 50 and buy mostly silver when it’s around 80. Buy a bit of both when the ratio is in the middle zone.
Why is the Gold/Silver Ratio at New Highs?
There are a few points of view on what a new high in the gold to silver ratio may mean.
1. That precious metals remain within the bear market or downtrend they have been in since 2011
Why? Because only gold has been rising in recent months and silver has not confirmed gold’s rise. i.e. a high gold silver ratio. So this argument says a bull market in precious metals will only occur when both metals are rising.
2. Conversely it may be that silver is merely lagging gold and will play catch up before too long
Gold is viewed as more of a flight to safety or crisis hedge than silver. So it could be that gold is stronger than silver due to some worry that sharemarkets are overdue for a correction.
Also back in 2001, at the start of the current bull market in precious metals, gold performed better than silver and precious metals miners did better than both metals. Silver was the last of the 3 sectors to recover and reached its lows in November 2001 (see the chart of that period of time below comparing, gold, silver and the XAU miners index).
So perhaps we are still seeing something similar play out here now?
3. The high gold to silver ratio may be signalling worry of a coming market crash
A post made on Silver Doctors asks “Is the Gold / Silver Ratio Sending Us A MAJOR WARNING??” It says:
“Over the last 100 years, the major peaks and troughs of the silver/gold ratio [GTSR] have marked HISTORIC turnings in the markets.
As the ratio surges through 80 to 1, is the gold / silver ratio trying to send us a MAJOR WARNING?”
It then goes on to outline how they believe the peaks of the ratio indicate peaks of economic stress. They outline 18 major peaks and troughs in the Gold silver ratio over the past century. Noting that the major peaks in the ratio occurred with likes of various crises such as the following occurring:
Oct 1986: 76 Economic and banking headwinds, Russian and currency crises abound
Jan 1991: 100 Start of major banking crisis, housing crash, 1000 banks were closed
Sept 1991: 92 Continuation of bank and housing crash
June 2003: 79 Culmination of tech wreck
…Nov 2008: 81 One month after Lehman crash
…The systemic stresses grow daily as the gold to silver ratio climbs.
The chances are much better that gold will go up significantly in price before silver. Silver is a lagging indicator.
I surmise gold goes up first because it is a metal that means something to the central banks, central governments and wealthy individuals.
Silver is poor man’s gold and when the vast majority of people realize they are behind the curve and must acquire precious metals, they go to silver.”Source.
So in essence, they argue gold is rising as an indicator of economic troubles brewing. It shows a loss of faith in governments and central banks. Wealthy individuals are buying gold.
Silver will catch up when more people start to notice and they buy silver.
What Do We Think?
We’re leaning more towards the second scenario. Believing (and okay maybe hoping!) that a new bull market in precious metals has begun. But that silver is lagging gold (and precious metals miners) much as it did back in 2001.
However if silver is indicating an impending crisis, it’s worth looking back to 2008 in our earlier gold to silver ratio chart. You’ll see that silver fell during the early stages of the 2008 crisis (depicted by the ratio rising sharply).
But silver then shot very quickly higher. In fact within 3 years it rose to touch its all time high of close to $50 an ounce from 1980.
How High Could Silver Rise if the Gold Silver Ratio Falls?
Below is an excellent table from Jeff Clark at goldsilver.com. It clearly depicts the possible upside in silver if the gold silver ratio reverses from here.
What to Do?
Own some of both as each metal performs differently under different circumstances.
But right now the ratio says that silver may be a better buy than gold. So there is a good argument for heavily skewing any purchases in favour of silver. You can buy silver here.
Just be prepared to have real patience. As silver can languish for long periods, just as it is doing now. But when silver moves, it moves fast. So it’s better to be months early than days too late.
What do you think? Show us you’re alive and leave a comment below!
To learn more about when to buy gold or silver check out this article: When to Buy Gold or Silver: The Ultimate Guide
Editors Note: This article was originally published 18 September 2018. Updated again 14 May and 11 June 2019 to show latest prices and charts.