The gold-silver ratio (“GSR”) measures the number of ounces of silver that can be purchased with one ounce of gold. But more than that, the GSR is a useful metric to measure the value of silver relative to the value of gold. It also reflects the relative interest or disinterest in the precious metals sector as an investment and wealth preservation asset.
Historical Overview of the Gold-Silver Ratio
Historically the GSR fluctuated between 10 and 15, though the ratio was as low as 2.5 in ancient Egypt. Since ancient Rome, about eight ounces of silver have been mined for every ounce of gold, annually. However, governments intervened to ensure the ratio was officially fixed at 12:1 during the Roman Empire, and over the centuries, the gold-silver ratio has remained at around 15 or lower.
In 1792, Congress passed the first Coinage Act and fixed the GSR at 15, which reflected the ratio established by the global market for gold and silver. Shortly thereafter, the world market ratio drifted up to 15.5 and the U.S. Congress thereby bumped up the ratio to 16 in 1834. At the same time, the price of gold was fixed at $20.67.
The chart below (source: TradingView) shows the gold-silver ratio from 1700 to the present:
After 1873, the gold standard became the basis for the international monetary system. As shown in the chart, the GSR began to drift marginally higher starting in 1874. The discovery of the Comstock Lode in Nevada led to record U.S. silver output which, in turn, depressed the price of silver and caused the GSR to rise.
Factors That Influence the Gold-Silver Ratio
Between 1920 and the present, the GSR became highly volatile relative to the centuries preceding 1920, with the GSR fluctuating between 25 and 100. In my opinion, the primary cause of this volatility was the gradual drift of the world to an unbacked, fiat monetary system. While the global monetary system was still attached to a fixed price of gold until 1971, the world began to drift away from a strict gold standard beginning in 1913, when the Federal Reserve was established.
Another factor that directly influences the price of silver is economic supply and demand. As such, the GSR also fluctuates in cycles that correlate with economic cycles. With 70% of silver production used for industrial purposes, the demand for a large percentage of silver produced annually ebbs and flows with the economic cycle. This in turn translates into cyclical price fluctuations for silver as well as the GSR.
Additionally, I would also argue that the “financialization” of gold and silver trading has introduced an added dimension of volatility to the prices of gold and silver and, therefore, the GSR. While I can trace trading in silver futures back to 1963, gold futures were introduced in 1974. As shown in the chart above, the last time the GSR traded as low as 25 was 1971 when the world went completely off the gold standard.
Since 1974, after gold futures trading commenced on the Comex, the GSR has spent most of its time above 50 and has averaged 60. To an extent, Futures trading can, over short periods of time, dictate the directional movement in the prices of gold and silver; when the price of gold declines, the price of silver declines more on a percentage basis. This latter attribute is because the silver market is smaller and more volatile than gold. This would explain the higher average ratio level of the GSR since 1974, particularly when the prices of both are declining.
The chart below shows the GSR on a weekly basis since 2000. This was the year when the 20-year precious metals bear market began to bottom and launch into the ongoing secular bull market:
How to Trade the Gold-Silver Ratio
Given the cyclical pattern of the GSR shown in the long-term chart above, it may be tempting to employ trading and/or investing strategies based on the relative level of the GSR and the relative price differential between gold and silver. The black horizontal lines show the “90th percentile” levels for highs and lows in the GSR since 2006.
For long-term investors focused on physical ownership rather than riskier, shorter-term trading strategies, the GSR can be an indicator of when to buy more silver or gold. Given the historical pattern of the GSR since 2006, when it is above the upper black line, silver is relatively cheap compared to gold, which suggests a buying opportunity for silver. The reverse is true when the GSR is at or below the lower black line boundary. In between the two lines is a matter of preference, but the relative premiums for minted gold and silver products might influence the decisions.
For those who want to both own physical metal and trade with ease, a digital precious metals account, like the one offered by Kinesis, makes it easy and low-cost to invest in and trade physical gold and silver.
In addition to owning physical precious metals in your account, for which you can ask delivery at any time, the platform offers the seamless, low-fee ability to shift between holding gold and silver or simply shifting the relative percentage weighting of each metal.
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend