15 October 2015
Sales Trader, Client Trading Services, Saxo Capital Markets
The gold-silver ratio is an important gauge when it comes to making precious metal investments – and, lately, as a barometer for the broader economy. Here’s what you need to know.
What is the gold-silver ratio?
The gold-silver ratio is the amount of silver in ounces it costs to buy an ounce of gold. For most investors the ratio is the only way of putting a true value on gold, which offers no income, coupon or earnings multiples.
How is the ratio worked out?
By dividing the gold price by the silver price you get the gold-silver ratio. At the time of writing the gold price was $1,135 and the silver price was $14.93. So, the gold-silver ratio was 76:1, meaning it would take 76 ounces of silver to buy one ounce of gold.
Image Source: iStock
How has the gold-silver ratio performed historically?
The value of gold and silver used to be inextricably connected; records going back to the mid-17th century show that the gold-silver ratio has fluctuated roughly between 14 and 100, but generally moved in tandem.
However, throughout the 21st century the gold-to-silver ratio has settled between 50 and 70, but has been extremely volatile.
Why is gold worth so much more than silver?
There is less of it available. The U.S. Geological Survey estimates that there's 17.5 times more silver in the Earth's crust than gold.
What does the gold-silver ratio tell us about the economy?
At the moment the ratio is high, but not so high relative to the 21st century average. That is due to a number of reasons:
- The economy is still under significant stress following the credit crisis and gold is often held as a safe-haven hedge against potential recessions.
- The euro zone crisis continues to cast a pall of uncertainty over the global economy.
- Talk of central banks in the US and the UK raising interest rates has again led investors to seek safer havens as they are uncertain over how the economy will react.
- Gold holds its value better and is a physical asset.
- Silver is undervalued; it is a good indicator for the health of parts of the economy, such as construction, medicine and technology, but investors remain to be convinced over the sustainability of the economic recovery.
How can it help me make investment decisions?
The current ratio suggests silver is undervalued; the economy is recovering; inflation should begin to pick up and central banks will begin to tighten monetary policy.
In "normal" circumstances that would see silver rising. However, we're living in the "new normal", and demand for gold will remain strong whilst the world continues its rocky recovery from the credit crisis.
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- Trade Spot Gold & Silver against the US Dollar, Euro, Japanese Yen, Hong Kong Dollar and Australian Dollar on live prices via our award-winning online trading platforms
- Leverage small price movements on the Gold & Silver Exchanges by up to 50 times both long and short
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