The Gold Silver Ratio

The Gold Silver Ratio

When investors are deciding to buy gold or buy silver, one of the key gauges is the Gold Silver ratio. However this ratio is open to interpretation, where should gold be in relation to silver exactly?

In other words how many troy ounces of silver are equal one troy ounce of gold? Ultimately the ratio can never be exact, as determining factors are constantly changing. However the following facts may be of use to investors when they attempt to decide where the ratio should be or when one metal is over/under valued against the other.

1. Many silver bugs say the ratio could and indeed should be 16:1. This level has only been reached 3 times for brief periods, in the last 113 years.
2. A level of 80:1 has been breached as many times and for longer periods in the same timeframe.
3. The average GS ratio for the 20^th century was 47:1 and the GS ratio since then has been slightly higher than 50:1. This equates to a rough average of 50:1 over the last 113 years.
4. In 2011 the GS ratio approached 30:1 this suggests that silver was overshooting to the upside according to the 113 year average.
5. Right now as of May 2013 the Gold Silver ratio is over 60, this indicates a silver overshoot to the downside.
6. It’s important to consider the fact there is less than ten times the quantity of silver mined vs. gold annually.
7. More than 30 times the quantity of silver is purchased for investment vs. that of gold.
8. Silver is more important industrially than gold and is often used in a non-recyclable manner.
9. Central banks, perhaps the biggest players in the worldwide physical market hold and are accumulating gold not silver. Central banks clearly consider gold to be more important as a reserve asset than silver.
10. The peak of the GS ratio was 100:1 in the very early 1990’s and the trough was 14:1 in the very early 1980’s. These extremes were within a decade of each other, and corresponded to the relevant bull and bear market emphasising silver ‘s extreme reactions to the prevailing market conditions.

It is important to recognise that although we are currently in the midst of a significant price correction in both gold and silver, the 12 year average for both metals shows we are most definitely in a precious metals bull market, When it comes to deciding which metal is better for you personally, the ratio is a useful guide but open to interpretation. The facts suggest a ratio of over 50 favours silver but be conscious that silver is an extremely volatile metal with often wild over and under shoots.