While gold has been selling off precipitous over the last month as investors seek to liquidate anything they can to cover mounting stock losses, one thing that has been moving higher is the gold-silver ratio.
For savvy investors, the gold-to-silver ratio is one of a variety of indicators utilized to asses the right (and wrong) time to buy or sell precious metals.
This calculation, in addition to other factors like economic uncertainty, inflation frenzy, and debt, has encouraged a plethora of individuals to invest in gold and silver, and over the past few years, even less capitalized investors are joining the party.
So what exactly is the gold-to-silver ratio?
The gold-to-silver ratio is the amount of silver it takes to purchase one ounce of gold. For example, if the gold-to-silver ratio stood at approximately 50 to 1, that means, at the current price, it would take 50 ounces of silver to buy 1 ounce of gold.
When the ratio is high, many investors interpret it to mean that silver is favored. This is because, relative to the ratio, silver is somewhat inexpensive.
Conversely, a low ratio tends to favor gold and maybe a signal it’s a good time to buy the yellow metal. Many large-scale, experienced investors may trade their silver for gold as the ratio drops.
The current gold-to-silver ratios is one of the highest on record. Data exist for an extremely long period of time– over 5000 years! During Pharaoh Menes’ time (circa 3100 BCE), for example, the ratio was 2.5x, whereas in King Hammurabi’s day (circa 1750 BCE), it was 6x. The legendary Greek king Croesus (circa 560 BCE), who supposedly invented gold and silver coins, and was more of a gold fan, used a 13.33x ratio. Emperor Constantine I (280-337 CE) was less so at 10.5x.1
“In the 70’s and ’80s, the gold-silver ratio was seen as a very effective trading tool because it normally ranged between 16 to 1 and 48 to 1. You can normally set your market watch by it for profit.: buy silver when the ratio was very high and sell gold, and sell silver and buy gold when the ratio was very low. Since that time, the ratio has gone very out of whack, and so you have to be very careful putting on a trade at the extreme high end,” said David Nelson, Bedrock Investments CEO.
However, all that had changed significantly since the start of 2020, when the ratio had been trading at roughly 85 to 1. During the first 18 days of March, the gold-silver ratio jumped from approximately 95 to the current value today of 124, which the highest level on record.
What is clear is that the precious metals as a group have been under pressure and trading dramatically lower ever since the coronavirus crisis began. However, never in history has it required 124 ounces of silver to equal the value of a single ounce of gold, until today, making silver a potential buy for many investors using the ratio.
In the end, for the ratio to return to its pre-1900 average of 16:1, the price of silver would need to climb to approximately $105 per ounce. Similarly, if the ratio were to drop to its long-term average of 47-50, silver prices would rise to about $61 per ounce.
For investors looking to purchase silver using ETFs, the iShares Silver Trust (SLV) or the VelocityShares 3x Long Silver ETN (USLV) are two options to choose from.
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