# A guide to the gold silver ratio

## What is the gold silver ratio?

The gold-silver ratio represents how many ounces of silver it would take to purchase one ounce of gold.

For example, if gold is trading at \$1800 an ounce and silver is at \$25, then the gold-silver ratio would be 72 (or 72:1) – as you would need to sell 72 ounces of silver to have enough to buy one ounce of gold.

## How to calculate the gold silver ratio

The gold-silver ratio can be calculated by dividing the spot price of gold by the spot price of silver.

The calculation used in the above example was 1800/25 = 72.

## What should the gold silver ratio be?

There is no ideal gold-silver ratio, although history gives us an idea of what has been considered suitable in the past.

The gold-silver ratio has been around for thousands of years, having been used by ancient civilisations including the Romans, Greeks and Egyptians. This was primarily because currencies have been historically tied to the value of the precious metals. In fact, governments were still fixing the ratio back in the 1960s before the gold standard – which saw the value of currencies such as the dollar directly linked to gold - was abandoned in the early 1970s.

The gold-silver ratio remained generally stable between a range of 12 and 15 whilst under the thumb of governments as they used it as a tool to provide monetary stability, but the ratio has been far more volatile and unpredictable since markets were left to gauge the value of the precious metals.

Since the gold standard was abandoned, the gold-silver ratio has fluctuated wildly from a low of 15 in 1980 to a high of 113 in March 2020.

Others believe the ratio should be based on quantity. There is thought to be around 16 times as much silver in the Earth’s crust than gold, leading some to argue that the ratio should also therefore be 16. Others believe the ratio should be even lower because much more silver is produced than gold.

## Historical gold silver ratio chart

Below is a chart showing the gold silver ratio between 1950 and March 2021.

## Why does the gold silver ratio fluctuate?

Gold and silver prices tend to move in the same general direction at the same time. However, the fluctuations experienced by each metal varies. The gold market is much more liquid than the silver market, which means trading activity tends to have a greater impact on silver and causes more severe price movements.

Plus, the drivers of the gold and silver price do differ. Gold has very little practical use and is used as a store-of value, with investors flocking to the safe-haven asset during times of uncertainty and crises or using it as a way to hedge against inflation. Meanwhile, while silver also acts as a store-of-value, it has many industrial applications by being a vital component in everything from electronics to medicine to make it more influenced by supply and demand factors.

This was evident when the ratio peaked to an all-time high in 2020. The coronavirus pandemic had erupted and caused turmoil for stock markets, causing investors to flee to the safety of gold and sending prices higher. As the same didn’t happen to silver, the ratio ballooned.

This is why the gold-silver ratio fluctuates even if both metals move in the same direction. For example, if gold was priced at \$1800 and silver at \$25 then the ratio would be 72. If gold then rose by 3% to \$1850 and silver experienced a larger increase of 12% to \$28, then the ratio would fall to 66 as you now need fewer ounces of silver to buy one ounce of gold. Similarly, if silver suffered a bigger decline than gold then the ratio would rise as you would require more ounces of silver to buy an ounce of gold.

## Trading the gold silver ratio

The simplest way of trading the gold-silver ratio is using it to determine where gold and silver prices are headed. The gold-silver ratio is a quick and efficient way of evaluating the relative value between the two metals to spot which one offers the best opportunity. A high ratio could signal that silver is undervalued, while a low ratio could imply gold offers better value. With this in mind, some traders aim to buy silver when the ratio is high and buy gold when it is low.

The crux of trading the gold-silver ratio is accumulation. By constantly switching between buying gold and silver depending on the movement in the ratio, you steadily build up quantities of both metals.

For example, let’s imagine a trader begins their journey with one ounce of gold. If the ratio rose to the higher end of its historical trend, such as above 100, then the trader could sell their one ounce of gold and buy 100 ounces of silver. As the ratio falls back down to a lower level of say 50, then the trader can sell their 100 ounces of silver and buy two ounces of gold. In this scenario, the trader has doubled the amount of metal they have.

There is the risk that the ratio works against you. For example, if the ratio then continued to fall below 50, then it would be uneconomical for the trader to turn there two ounces of gold back into silver and they would have to wait until the ratio returned significantly above 50. This is why this strategy works best when the ratio is at the extreme end of the historical range. If the ratio is above 100 then it is far more likely to fall lower than head higher, and when it is below 50 it is far more likely to rise than decline further.

It is important to take the increased volatility in the gold-silver ratio in recent years into consideration and the fact that prices of the two precious metals have become more dislocated than in the past.

## How to trade the gold silver ratio

You can trade gold and silver with City Index using CFDs. Just follow these easy steps to get started:

1. Open a City Index account, or log-in if you’re already a customer.
2. Search for ‘gold’ or ‘silver in our award-winning platform
3. Choose your position and size, and your stop and limit levels

Alternatively, you can trade both precious metals using Exchange-Traded Funds. These trade like stocks but track the performance of the underlying asset, which in this case is gold or silver. Two popular ones are ETFS Physical Gold and ETFS Physical Silver. One benefit of trading ETFs over the commodities is that you can also trade them using either CFDs or spread bets.

## More from Gold

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