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What the gold-silver ratio tells us about the gold price

by , 29 September 2014

The gold-silver ratio describes how many ounces of silver it takes to buy an ounce of gold.

You can use this ratio to look at the relationship between silver and gold to indicate where the gold price is going.

Let's take a closer look at how this works…


The current gold-silver ratio


At the moment, it takes about 68 ounces of silver to buy one ounce of gold.

When silver hit its high in 1980 of $50 an ounce, you only needed 15 ounces of silver to buy one ounce of gold.

If you look at the gold-silver ratio of the metals in the ground, it’s about 17 to one. But above the ground it’s different. People use silver, whereas people hoard gold.

The highest the ratio has ever been was in the 1990s. It hit 95 to one, Dominic Frisby in Money Morning UK explains. That’s when silver traded at its lowest.

Silver tends to be more volatile than gold. This volatility means it performs to the upside and to the downside.

What you generally find is at the end of bear markets, the gold-silver ratio spikes up. The reverse happens in bull markets.

In 2003, the ratio was at 82. In 2008, it hit 88 intraday. It’s been rising since 2011. And looks like it could rise up to 80 at the very minimum.

What that means is if the ratio was 80, if silver falls to $15 an ounce, then the price target for gold is $1,200. If silver falls to $10 an ounce, then the price target for gold is $1,000.

This suggests that the price of gold won’t fall below $1,000, even if silver falls from its current levels.


What to do about gold


Gold can be a good diversifier and financial insurance for your portfolio. Having around 5% in your portfolio is ample.

If you have more than that, don’t rush to sell. The price should eventually recover. Only do it if you need the money.

Silver on the other hand is a bit harder to call.

So there you have it, what the gold-silver ratio tells us about the gold price.

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What the gold-silver ratio tells us about the gold price
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