Silver: Interpreting the Gold to Silver Ratio

Both Gold and Silver are used as a store of wealth and a hedge against inflation. Therefore, ​the gold-to-silver ratio is an important metric for silver investors to monitor in a similar way to which the professionals do for the purpose of price predictions and asset allocations.

The ratio indicates how many ounces of silver are required to purchase one ounce of gold, serving as a barometer for the relative value of these two precious metals. 

It's a simple ratio calculated by dividing the current price of gold by the current price of silver. At the time of publication, the US dollar gold price is $3018oz and the silver price is $33.10oz, indicating a ratio of 91.2.

Historically, this ratio has experienced significant fluctuations. During the Roman Empire, it was fixed at 12:1, while in 2020, amid the COVID-19 pandemic, it peaked at an unprecedented 125:1 as the gold price surged and silver remained relatively flat.

For investors, the gold-to-silver ratio offers insights into the relative valuation of gold and silver.

A high ratio suggests that silver is undervalued relative to gold. Investors might interpret this as an opportune moment to purchase silver, anticipating that the ratio will revert to historical norms, thereby being precursory to a rise in silver's value. ​

Conversely, a low ratio indicates that silver may be overvalued relative to gold, which might prompt investors to consider reallocating their portfolios in favour of gold.

What is the long-run average for the gold-silver ratio?

The long-run average gold/silver ratio is around 65:1 since the 1970s when the gold standard was abandoned.

The practice of trading the gold-silver ratio is common among investors in gold and silver. The usual method of trading the ratio is hedging a long position in one metal with a short position in the other.

For example, say the ratio is at historically high levels and an investor anticipate a decline in the price of gold relative to the price of silver. Those investors would simultaneously buy silver while selling short an equivalent amount of gold. If their assumption is correct, they will realize a net profit from a relatively better price performance of silver compared to that of gold.

For those who believe the ratio converges to its long-term mean, the current high gold-to-silver ratio may signal an opportune time to increase exposure to silver assets, anticipating a potential correction in the ratio that could enhance silver's value.​

This could have implications for ASX-listed silver companies SVL, ADT and (after today) ERW.