The Gold-to-Silver Ratio: A Tool For Investing in Precious Metals

The Gold-to-Silver Ratio is a comparison between the price of gold and silver at any given time in the market. The comparison is made by determining how many base units silver it would take to buy a base unit of gold (usually either in ounces or grams, depending on your country.) This price has varied over the centuries, and has been often used as a marker of everything from currency stability to the effects of artificial price fixing. The relationship between gold and silver is also useful marker of when one metal is overvalued relative to the other.

The Gold-to-Silver Ratio in History

While the gold-silver ration remained largely static for most of human history at a rate of about 19:1 (due to both gold and silver’s use as a form of currency), with the 20th century came a large-scale movement towards fiat currency, which radically altered the heavily regulated production of gold and silver. Some economists forecast a movement back towards the traditional ratio based on relative silver scarcity. However, this has not actually occurred yet on such a scale, and in some cases precisely the opposite has taken place. Silver sellers often use the inflated ratio from the 20th century to the present as an argument to increase silver holdings.

Besides some historical rises and dips, the Gold-To-Silver Ratio has largely remained between 60:1 to 70:1 over the past ten years. While anyone can determine the Gold-to-Silver Ratio at any time by simply dividing the price of gold by the price of silver, using the ratio as an observational tool allows investors to move from one to the other and profit.

Investing With the Gold-to-Silver Ratio

The Gold-to-Silver Ratio works best with government and private bullion–as opposed to collectible coins– due to a heavier markup over the spot price, which can become very expensive and dramatically alter the value of the ratio. Thus, the following assumes you are investing with bullion. While one can marginally replicate what is being discussed here with silver and gold ETF’s, the reality is that taking physical possession of the metals backing the shares is often a difficult, cumbersome process (and sometimes impossible unless you have a large number of shares). Bullion remains the most logical way to invest in gold and silver.

Using a simple “buy low, sell high” formula, it’s fairly straightforward for an investor to watch the ratio and use it to change hands from gold to silver based on relative value. If the ratio is high, this means that silver is cheaper, so purchasing silver bullion makes the most sense. With every drop comes an eventual rise leading to a subsequent drop. If the ratio is low, this means gold is weaker and silver is stronger (which has not, in the past 30 years or so, lasted long) so purchasing gold bullion is the smartest move.

Using the Gold-to-Silver ratio is the most effective way to leverage precious metal investing, which is the safest and most time-tested form of investment available today. Smart investing is always diversified, but keeping both market trends and historical averages in mind will give you the peace of mind of knowing that you can make the smartest move with your next bullion purchase.

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