What The Gold/Silver Ratio Is Saying [SPDR Gold Trust (ETF), iShares Silver Trust (ETF)]

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October 17, 2014 12:13pm NYSE:GLD NYSE:SLV

gold and silverPeter Krauth: The gold/silver ratio is more than a price comparison of two precious metals.


This calculation helps identify the relative values of these metals to each other. It tells you if gold and silver are cheap or expensive.

And it just might help you get a better deal…

It’s an important tool to use when buying gold or silver – or both. As markets continue their losing streak and precious metals investors look to load up, here’s how the gold/silver ratio can help.

The Gold/Silver Ratio Explained

The gold/silver ratio shows how many ounces of silver are needed to buy one ounce of gold.

To calculate it, divide the current gold price per ounce by the current silver price.

Looking back in history to 1687 (the oldest records we have), this ratio has swayed between 14 and 100, but was stable at around 16 for centuries. According to the U.S. Geological Survey, silver is about 17.6 times more abundant in the earth’s crust than gold, which provides some rationale for the long-term average of about 16.

Of course, the ratio fluctuates over time. But it’s a great gauge that gives you the relative value of one metal versus the other.

The long-term gold/silver ratio chart shown below gives some perspective.

gold/silver ratio

Take a look at the period ranging from about 1970 to 1980.

The ratio’s average during the last precious metals bull market was about 30, meaning it took 30 silver ounces to buy one gold ounce.

By the end of that secular bull market, silver spiked to $50 at a point when gold traded for $750, producing a ratio low of 15.

Now, fast-forward to the current precious metals bull market.

How to Use the Gold/Silver Ratio Today

The first thing to note is that since 2000, the gold/silver ratio has mostly traded in a range between 45 and 80, but has averaged about 55, which is considerably higher than it was during the last bull market.

When the financial crisis hit in late 2008, gold dropped to $720, but silver fell harder to $9. This caused the gold/silver ratio to spike to 80. Gold clearly acted as the safe haven in that time of duress.

But as the current bull continues to mature, I think the ratio is going to work its way much lower than current levels.

And that spells serious opportunity for future silver prices.

I’ll be saying much more about the gold/silver ratio and my forecast for silver prices next week – so stay tuned.

Money MorningWritten By Peter Krauth From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.


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