The Gold/Silver Ratio: Definition and History

A lot of precious metal dealers use various ratios and market indicators to determine when the right time to buy or sell silver bullion would be. Ideally, investors hope to make a profit on the assets they have invested in and when it comes to silver and gold various other factors come into play. These include political and economic uncertainties, rising inflations, failing currencies, government debts, and other factors. Yet to a lot of investors to gold-silver ratio is an important yet elusive indicator. 

What is the gold/silver ratio?

Basically, the definition of the gold/silver ratio is the amount of pure silver (in troy ounces) it would take to buy a troy ounce of gold. To get the current ratio, simply take the current gold price and divide it. For most of 2020-2022, the gold/silver ratio has been skating around 80:1. This means it would take 80 ounces of silver to purchase an ounce of gold. 

Precious metal investors who buy and sell silver bullion and other precious metals monitor the gold/silver ratio as a signal of the best time to buy or sell silver bullion. The general consensus is

when the ratio is high, you would need more silver to buy an ounce of gold. It could mean that the price of silver is low enough to buy more of but it is not as clear as that. The current ratio of gold-to-silver is higher than the historical average. This suggests that silver has a greater potential to offer greater profit than gold at this point. This means that a low ratio would have been more in favour of gold than silver. 

The gold/silver ratio fluctuates so often and so much, it might be hard to make long-term decisions based only on the ratio. Instead, it should be used as one of the many market indicators you should consider when trading silver. 

Typically, the ratio is impacted by what happens to gold more than silver. Factors that influence the ratio include:

  • The production and profitability of gold mines can affect the gold price
  • Fluctuating interest rates. The price of gold tends to shift more than the price of silver when interest rates fluctuate. For example, when interest rates go down, the price of silver suffers whilst gold benefits in a positive way. When they go up silver does better than gold.
  • Uses for these metals: Silver is more than just an investment asset or currency but it is one metal that is used in a wide range of industries. It is used in manufacturing from automobiles to aeronautical industries. Silver has excellent conductivity and reflective properties it is used in electronics and most notably in the ever-growing alternative energy sector as the major component of photovoltaic cells used in solar panels.

The gold/silver ratio has an interesting history. Around 1687 the gold/silver ratio moved between 14-to-1 and 100-to-1. In the 19th and 20th centuries, it hovered around 16:1. At that time several countries used gold or silver-backed currencies. The United States and France were two major countries whose currencies were backed by either gold or silver. These two countries pretty much set the gold/silver ratio. 

One other reason for pegging the ratio at 16:1 is the U.S Geological survey that was taken to determine how much silver and gold could be found on the earth’s crust. It was estimated then that there is 17.5 times more silver than gold in the earth’s crust. This seemed to substantiate the gold/silver ratio of 16:1. Through much of the 20th century, the ratio has averaged 50:1 and has been known to fluctuate very wildly. There are precious metal experts who believe the return could return to 16:1. That would mean silver would have to be priced at $75/oz. This might seem improbably considering the current price and how long it has taken silver to even hit $30 an ounce. The moral of the story: if you are going to look for the best time or best reason to sell silver consider this ratio but also consider what is happening in the markets.