Trading the Gold-Silver Ratio

Simply take the price of gold, divide it by the price of silver and Voilà! Other factors – including economic uncertainty, inflation frenzy and debt – have encouraged millions to invest in gold and silver, and in the past few years, small-scale investors have begun to climb aboard. Around the year 3000 BC, the first Egyptian pharaoh, Menes, declared that two and half parts of silver were equivalent to one part of gold. Although the ratio refers to the difference between raw materials, it really reflects the replacement potential between the two metals. Gold and silver both have long-lasting backgrounds both as commodities​ and as currencies.

For instance, France and the United States (among others) assigned statutory limits on what the ratio could be. Open a BullionVault account today and you can claim 4 FREE grams of silver to test our service for yourself at no risk or cost. One estimate in the early 2000s said the above-ground stockpile of gold could meet more than 6,600 days of demand.

Silver coinage continued through to the 1950s and ’60s in the United Kingdom and the United States. But the metal’s value had no bearing on the value of money, becoming just a token like copper or nickel coins. The Gold-Silver Ratio has been as low as 2.5 oz of silver to acquire 1 oz of gold (ancient Egypt).

For gold, in contrast, the last 10 years’ average open interest in Comex derivatives equated to just 65% of one year’s global mine output. Even early 2020’s new record high in gold open interest has taken it only to 109%. Investors trading gold and silver look to the gold-silver ratio as an indicator of the right time to buy or sell a certain metal. The practice of trading the gold-silver ratio is common among investors in gold and silver. The most common method of trading the ratio is that of hedging a long position in one metal with a short position in the other. The difficulty with the trade is correctly identifying the extreme relative valuations between the metals.

Dealers cannot afford to simply eat this cost, and therefore pass this cost along directly to customers. The bid price is the maximum offer available for a particular commodity at the present time. The ask price is the minimum asking price available for a particular commodity at the present time. With patience, research and a long-term view, you may choose to buy silver when the ratio is high – buying higher quantities with fewer dollars. Only the most experienced investors make profits using a short-term view, and even they suffer errors in judgment. This was likely because many countries were using gold- and silver-backed currencies.

  1. In this case, the investor could continue to add to their silver holdings and wait for a contraction in the ratio, but nothing is certain.
  2. For example, assuming a gold silver ratio of 50 to 1, investors would have to only part with 1 ounce of gold to acquire 50 ounces of silver.
  3. Investors often use this ratio to help them accumulate more gold or silver, selling one to buy the other.

Learn about gold market investment best practices and the history of gold. The sequence ,
of power fractional parts, where is the fractional part,
is equidistributed for almost all
real numbers ,
with the silver ratio being one exception. For example, we will examine times the Gold Silver Ratio has fallen above or below its 20th and 21st Century averages or longer, which will show you in various longer-term Gold Silver Ratio charts below.

The yellow line tracks the ongoing fiat US dollar price of gold in this 21st Century bullion bull market (see left axis). When silver performs best versus gold in recent history is often during timeframes in which fiat currencies and their enduring values are most acutely called into question by the investing masses. Many bullion buyers, including ourselves, believe another era of fiat currency faith loss will come to fruition soon enough.

The History of the Gold-Silver Ratio

The ratio remained fairly stable throughout most of history, starting to fluctuate in the 20th century. The gold-silver ratio is calculated by dividing the current market price of one ounce of gold by the current price instaforex review of one ounce of silver. As well, we have written about what the Gold-Silver Ratio is in general, including a practical guide to how some gold and silver bullion buyers and investors use it when buying their bullion.

ETFs (exchange-traded funds​) are a viable alternative to trading gold and silver assets. Some investors prefer to avoid trading gold or silver commodities and would rather keep open positions in gold and silver ETFs, which work instead by tracking the asset’s underlying price. When the ratio rises, they invest in silver ETFs and when it falls, they invest in gold ETFs. Exchange-traded funds (ETFs) offer an accessible and simple means of trading the gold-silver ratio. Again, the purchase of the appropriate ETF—gold or silver—at trading turns can be used to execute your strategy.

The Importance of the Gold-Silver Ratio for Investors

For experienced investors, the gold-to-silver ratio is one of many indicators used to determine the right (and wrong) time to buy or sell their precious metals. Individual investors who get too wrapped up in trying to target a certain ratio before investing in gold or silver may end up sitting on the sidelines too long and missing out on good investment gains. With investors being able to invest in both gold and silver through a precious metals IRA, they don’t have to worry about setting up multiple investment vehicles. Investors can roll over existing retirement assets from 401(k), 403(b), TSP, and similar retirement accounts into a gold IRA or silver IRA relatively easily. That allows them to enjoy the same tax advantages of conventional IRAs while benefiting from the protection of precious metals.

Why Does the Gold-Silver Ratio Matter to Investors?

When the ratio is higher and investors believe it will drop along with the price of gold compared to silver, they may decide to buy silver and take a short position in the same amount of gold. Our silver spot price page contains various interactive charts of silver prices, including spot silver charts. Not only can these charts be adjusted for different time frames, one can also compare silver prices directly to other asset classes such as the SP 500, crude oil or U.S. dollar. The gold/silver ratio is the amount of silver needed to buy an ounce of gold. The relationship is used by many precious metal investors and gold traders​ as a fundamental indicator for determining the best time to buy or sell. But for much of its history, as gold and silver were used as monetary metals, the two were traded in legally fixed ratios.

Related Terms

Today, this ratio fluctuates as gold and silver prices are regulated by market forces, but this has not always been the case. In the past, the ratio used to be fixed by law, since governments seeking monetary stability were able to set their own ratio. The gold silver ratio is just a numerical expression of the number of ounces of silver that have the same value as one ounce of gold.

Dealer markups in precious metals are no different than in any other business. Dealers have a cost of doing business that they must take into account, and then they must have some type of profit margin in order to stay in business. Brick and mortar store dealers often must charge higher dealer premiums due to the higher cost of doing business.

Ways to Use the Gold-Silver Ratio to Trade

Taking delivery on a silver futures contract involves additional fees and costs and one is limited in the product type. In addition, the amount of silver is fixed as one regular silver futures contract equates to 5000 ounces of silver. In the end, in order for the ratio to return to its pre-1900 average, the price of silver would need to rise to approximately $105 per ounce. Likewise, if the ratio were to drop to its long-term average, silver prices would rise to about $61 per ounce.

Silver bullion coins derive most of their value from their bullion content or any collectible value. Have you ever seen someone pay for groceries in a store with silver eagles? That being said, however, silver bullion coins like American silver eagles are considered good, legal tender and could be used to make purchases.