A Historical Guide to the Gold-Silver Ratio

Any investor who is interested in the precious metals market watches the current prices of gold and silver closely. But the current gold-silver ratio is, to many investors, of as great an interest as the prices of gold and silver.

The gold-silver ratio describes the price relationship between gold and silver. The ratio indicates the number of ounces of silver it takes to equal the value of one ounce of gold.

On July 26, 2024, for instance, the market price of an ounce of gold was $2,387 per ounce. The price for an ounce of silver was $28. The gold-silver ratio therefore was about 85:1.

The gold-silver ratio is the oldest continuously tracked exchange rate in history. In modern times, professional traders “trade the ratio,” placing bets on the short-term direction of gold or silver prices and the changes in the ratio that follow those changes,

Key Takeaways

• The gold-silver ratio expresses the price relationship between gold and silver.
• The ratio shows the number of ounces of silver it takes to equal one ounce of gold.
• The gold-silver ratio used to be set by governments for monetary stability but now fluctuates with the market.
• Throughout history, the ratio has remained fairly stable with increased volatility beginning in the 20th century.
• Traders and investors trade the gold-silver ratio for hedging purposes as well as to realize profits.

The History of the Gold-Silver Ratio

For hundreds of years, the gold-silver ratio did not fluctuate much. The ratio was fixed by governments to keep their official currencies stable.

The Roman Empire officially set the ratio at 12:1. In medieval Europe, it fell to 9.4:1 in 1350 but climbed back to 12:1 in the 1450s. The U.S. government fixed the ratio at 15:1 with the Coinage Act of 1792.

Changing Times

The discovery of massive deposits of silver in the Americas, combined with attempts by several governments to manipulate gold and silver prices, led to substantially greater volatility in the gold-silver ratio in the 20th century.

When President Roosevelt set the price of gold at $35 an ounce in 1934, the gold-silver ratio began to climb to new, higher levels, peaking at 98:1 in 1939.

Following the end of World War II, the Bretton Woods Agreement of 1944 pegged foreign exchange rates to the price of gold. The ratio steadily declined through the following years.

Then, in the 1970s, the U.S. government finally abandoned the last remnants of the gold standard. From there, the ratio rose rapidly through the 1980s, peaking at 97.5:1 in 1991 when silver prices declined to less than $4 an ounce.

For the whole of the 20th century, the average gold-silver ratio was 47:1. In the 21st century, the ratio has ranged mainly between 50:1 and 70:1, breaking above that point in 2018 with a peak of 104.98:1 in 2020. The lowest level for the ratio was 35:1 in 2011.

Investing in the Gold-Silver Ratio

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 investors 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.

Note

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.

As long as the gold-silver ratio moves in the direction an investor anticipates, the strategy is profitable regardless of whether gold and silver prices generally are rising or falling.

How Is the Gold-Silver Ratio Computed?

The gold-silver ratio is calculated by dividing the current market price of one ounce of gold by the current price of one ounce of silver. So, if the current price of an ounce of gold is $2,000 and the current price of an ounce of silver is $30, the ratio is 66:1.

When Was the Gold-Silver Ratio at Its Highest?

The highest the gold-silver ratio has been in recent history was in April of 2020, following the onset of the COVID-19 pandemic when the price of gold outpaced silver by more than 125:1.

What Is the Historic 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. Historically, the ratio hovered more around 15:1.

The Bottom Line

The gold-silver ratio measures the amount of silver it takes to equal the value of an ounce of gold. The ratio remained fairly stable throughout most of history, starting to fluctuate only in the 20th century when governments stopped trying to fix gold prices.

Some investors in precious metals don’t only trade gold and silver. They place bets on the direction of the ratio based on their sense of the likely direction of the prices of one or both metals.

Read the original article on Investopedia.