What is the gold silver ratio? Why has the gold silver ratio been making new all time 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 did the Gold to Silver Ratio Reach New Highs This Week?
- 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 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 $1529.45 (gold) divided by $12.69 (silver) equals a gold to silver ratio of 120.52.
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. Reaching a new all time high today of 120.
So What is the Ratio Telling Us Now?
The gold silver ratio is telling us to buy silver over gold currently. At 120 the ratio is the highest it has ever been. So silver is very undervalued compared to gold on a historical basis.
Or put another way, silver is the most hated it has ever been compared to gold.
We have seen the ratio as high as 100 back in 1991, so there was always the chance it could go higher – and it has.
We could yet see it spike even higher up toward say 150. See how the upper trendline in the chart above hasn’t been reached yet.
But as fast as the ratio has spiked up, we could yet see it spike down just as quickly. In the 2008 financial crisis the same thing happened. The ratio spiked to almost 90 before then falling sharply for 2 years to 31, as silver caught up to gold.
So currently silver is incredibly undervalued compared to gold. Both metals are undervalued compared to dollars. Whether they be US Dollars or NZ Dollars.
Investors have been rushing toward gold due to the panic around the Corona Virus and crashing sharemarkets. They have been ignoring silver. And recently even selling silver.
Why? Possibly due to margin calls after stock markets have fallen so much. Investors who have borrowed to buy stocks are forced to sell whatever they can to add to their funds with the lenders. Gold and silver are very liquid and therefore an easy source of funds.
This is one reason why both gold and silver have fallen recently. Another could be manipulation. Silver is a much smaller market than gold and therefore easy to move the price. (Also see: If Gold and Silver Are Manipulated, Why Bother Investing?)
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 above 70. Buy a bit of both when the ratio is in the middle zone.
Why is the Gold/Silver Ratio Recently Making New Highs?
There are a few points of view on what a new high in the gold to silver ratio may be signalling….
1. That precious metals remain within the bear market or downtrend they had been in since 2011
Why? Because only gold has been rising 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. However below is an alternative viewpoint.
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 has been stronger than silver due to some worry that sharemarkets are overdue for a correction. Given what has happened in recent days, that seems likely now!
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. Silver 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 have been witnessing something similar play out recently? In the last 2 days gold miners have moved sharply higher even though gold and silver have been falling. They may be indicating a rebound in precious metals.
3. The high gold to silver ratio may be signalling worry of a coming market crash
A post made on Silver Doctors back in 2016 looks to have been on the money. It asked “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 has been rising as an indicator of economic troubles brewing. It shows a loss of faith in governments and central banks. Wealthy individuals are buying gold.
The argument looks to have been pretty spot on, given the crash we have witnessed/are witnessing currently.
Silver will catch up when more people start to notice and they buy silver. It’s likely they’ll think gold is too expensive and opt for silver instead.
What Do We Think?
We’ve been leaning more towards the second scenario. Believing 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.
Previously we had thought this trend might be coming to an end. With silver starting to play catch up in 2019 after the recent outperformance of gold. But silver has dropped much more sharply than gold in the current crash.
However as noted already, 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 up quickly higher. In fact, within 3 years silver 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 continues to say 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.
But when silver moves, it moves fast. So it’s better to be months early than days too late. So even if the ratio were to go higher, we think a major move higher for silver is only a matter of time.
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. Last updated 18 March with new charts and commentary.