What is the Gold Silver Ratio? Why is the Gold Silver Ratio at New Highs?

What is the Gold Silver Ratio_ Why is the Gold Silver Ratio at New Highs

What is the gold silver ratio? Why is the gold silver ratio at new highs?

In this post you’ll learn:

  1. What is the Gold Silver Ratio?
  2. How is the Gold to Silver Ratio Used?
  3. What is the Ratio Telling Us Now?
  4. Why is the Gold to Silver Ratio at New Highs?
  5. 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.

 

How is the Gold/Silver Ratio Used?

The ratio 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 at a 10 year record of almost 85.

Gold Silver Ratio 20 Year Chart

 

So What is the Ratio Telling Us Now?

The gold silver ratio is telling us to buy silver over gold currently. With the ratio reaching over 80, silver is very undervalued compared to gold on a historical basis.

The gold silver ratio closed at 84.93 on 14 September 2018. Not since 2008 has the gold silver ratio been this high. In fact on a closing price basis (rather than an intra-day price as in the chart above) the ratio has not been this high in 27 years. All the way back to 1991. Today it has backed off slightly and the ratio is now down to 84.78.

However we have seen the ratio as high as 100 back in 1991, so there is always the chance it could go higher yet.

Nonetheless currently silver is 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.

Gold Silver Ratio Chart - Buy Zones

 

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?

Gold Silver and Miners Chart 1999 to 2006

 

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 and 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.

 

What to Do?

As we’ve said many times that’s why when people ask gold or silver, we prefer to say gold and silver.

Own some of both as they perform 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. 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

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23 thoughts on “What is the Gold Silver Ratio? Why is the Gold Silver Ratio at New Highs?

  1. Paul says:

    I agree that the ratio is too high but don’t know how to take advantage of this except by buying more silver than gold. Is selling gold futures and buying silver futures a safe way of achieving the same thing…how about margin calls, commission rates etc…I don’t know much about futures trading
    Regards
    Paul

  2. Stuart Hope says:

    I too believe that silver is lagging gold but sometime in the next couple of years there will be a catch up period. The maths is simple…if gold rises from is current $1250 USD to say $2000 USD with a current GSR of 83 (60% increase) then a drop in the GSR to say 60 would see the silver spot go from its current $15.15 USD to $33.33 USD (120% increase).

    In my view, a 33% gold vs 66% silver investment ratio is a safe approach rather than putting all the eggs in the silver basket.

  3. Glenn says:

    Can’t argue with that theory Stuart. Silver does seem to have plenty of upside from here. And yes indeed best not to have all eggs in one basket.

  4. Glenn says:

    Thanks for commenting Paul. We prefer the method of buying more silver than gold too at times like this. From a trading perspective then yes buying futures or even Exchange Traded Funds (ETF’s) could be profitable on a more short term horizon. But yes you’d need to take commissions into account and only “play” with what you can afford to lose as silver can be volatile for sure!.

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