The Gold-Silver Ratio Explained

gold coin, silver coin, gold and silver coins, gold and silverIf you’re looking to expand your knowledge of precious metals investing so you can identify more opportunities to increase your holdings and make a profit, then you’ll want to learn about the gold-silver ratio.

The gold-silver ratio is, to put it quite simply, the number of ounces of silver required to purchase a single ounce of gold. The ratio is obtained by dividing the current spot price of gold by the current spot price of silver, and as of this writing, stands at 78 ($1091.50/$13.98).

Now what does this number actually mean to an experienced precious metals investor? Here are a few observations and strategies the savvy investor might consider:

  • The gold-silver ratio averaged around 47-50 throughout the 20th century, which puts 78 slightly on the high side.
  • A high gold-silver ratio typically indicates that silver is undervalued compared to gold (a low gold-silver ratio would of course indicate the opposite).
  • Depending on which way investors believe the gold-silver ratio will move, they can purchase future contracts on short-term price changes for one or the other.
  • A relatively high gold-silver ratio also gives investors opportunities in the options market, which would entail buying long-dated puts on gold and calls on silver.
  • Investors that wish to increase their holdings of physical silver may interpret the current ratio as an indication that the metal is at a bargain price, and therefore purchase more of it to add to a precious metals IRA or to simply store in a safe.

Using the gold-silver ratio to help make investment choices is something that requires significant knowledge, understanding, and experience to execute properly. The information presented here is just the beginning, so be sure to continue researching on your own—or better yet—set up a consultation with a professional to evaluate precious metals investment opportunities that fit your situation and goals.