The price action of gold and silver is closely followed by Wall Street. But in a less known indicator lurks the secrets to potential riches and gaining an edge up on Wall Street. To the astute investor the gold-silver ratio can potentially signal significant shifts in market sentiment to uncover big profits.
What is the Gold-Silver Ratio?
The gold-to-silver ratio is a long-standing tool. It shows many ounces of silver are needed to buy one ounce of gold. For example, if gold is priced at 1800 dollars and silver at 20, the ratio is 90 to 1, or simply 1800 divided by 20. It can reveal changes in market trends and opens the door to buying opportunities.
History provides the clues
The gold-to-silver ratio usually stays between 50:1 and 80:1. As a result, when it moves out of this range, it can signal buy- and sell-points. A high ratio show that silver is undervalued compared to gold. Conversely, a low ratio shows that silver is doing well, which it often does at the end of precious metals bull markets. Furthermore, the ratio show how these two metals respond to outside forces. In times of crisis gold tends to shine. While the silver price, and the demand for silver, is closely tied to industrial growth, but this is not always the case.
Background
The gold-silver ratio is probably the oldest tracked exchange rate in history and has been around for centuries. It was first set at 12:1 in ancient Roman times, but over the years, the ratio has fluctuated dramatically. In modern history it has ranged widely, from 15:1 to over 100:1. Its shifts reveal much about the broader economic landscapes of the times. For example, changes in inflation, supply and demand and shifts in market sentiment can all affect it.
Silver was more valuable in ancient times
In ancient times the gold-silver ratio varied significantly between civilizations. It depended on how much of each metal was available at the time and in the specific country. For example, in Egypt, the ratio was all the way down at around 2:1, because silver was much more scarce there. Two parts of silver were worth one part of gold. Conversely gold was much more common, because of their Nubian gold-mines. As a result the ratio was much lower.
Ancient China
In Ancient China, the gold-silver ratio typically fluctuated between 6:1 and 10:1, reflecting similar dynamics. Silver was scarce in China at certain points, making it more valuable relative to gold. As a result, the ratio was quite low. A lot lower than the broader 12:1 ratio, established later by the Romans, and quite typical in the west.
Availability and value
History show that supply and demand have shaped the gold-silver ratio very differently throughout time. Further, it can vary widely. From the Ancient Egyptian ratio of 2:1, to the 15:1 ratio set by Isaac Newton, to the much higher ratio of above 80 today.
Here’s the gold/silver ratio this month:
When to buy?
In economic chaos, a soaring gold-silver ratio often reflects gold’s role as a safe haven. For example, when I write this in October 2024, we have big wars in Europe and the Middle East. Consequently the ratio is now at 84. The same thing happened in the 2008 financial crisis, when the ratio spiked above 80 in the initial chaos. But as the crisis went on, silver began to catch up to gold. Hence creating new wealth for silver investors.
In bull markets, silver often peaks before gold even though it lags it on the way up. That’s why a falling ratio, after a long bull market, could mean a top and a coming bear market. The last precious metals bull market ended in 2011. Then the pattern was typical. Silver peaked in April, while gold peaked in August. Same in many earlier bull markets.
In practice
The ratio has a lot of practical uses for short-, and long-term trading. It acts as a guide for when markets shift. For example, Silver is undervalued compared to gold when it hits extreme highs. Investors can take advantage of this by increasing their silver holdings, if they expect silver to catch up over time.
In the pandemic it reached record highs. Investors who bought silver at low prices made good returns when the ratio moved back to normal levels. Which highlights another use of the ratio, portfolio rebalancing. Because as the ratio changes, investors can adjust their gold and silver holdings. When it is high Silver is undervalued. A low ratio may point to rising silver demand. Or it could suggest that gold is near a peak, depending on the broader market context.
Historic Examples
The gold-to-silver ratio hit extreme highs in the Great Depression of the 1930s. By 1933, it peaked near 100 to one, as demand for silver collapsed. This spike followed a period where silver prices lagged behind gold during the economic collapse, widening the gap. As the economy began to recover a bit, the ratio fell. By 1939, it had dropped to about 47 to 1, and silver prices rose sharply. Investors who bought silver around the 1932 to 1933 peak made a lot of money.
1970s
The 1970s brought another key moment for those watching the gold-to-silver ratio. In 1971, the ratio was around 40:1. Nevertheless, as inflation and economic chaos grew, it rose sharply, reaching above 85 to one by 1973 and 1974. Investors who bought silver and held it until the 1980 peak made a lot of money. Because in 1980 silver hit a record high of 50 dollars and the ratio dropped to 15:1.
2008 Financial crisis
The ratio spiked up again in the 2008 financial crisis. Rising to above 80:1. As investors rushed to gold for safety, silver lagged behind. Those who bought silver during this period did so at a relative discount and would later see silver peak at 48 dollars in April 2011. As the global economy recovered, the ratio dropped to 32 to 1. As many times before Gold peaked a few months later in august.
When to Sell
When the ratio is very high, for example above 80 to 1, silver has often been undervalued compared to gold. These periods are often followed by corrections, with silver rising in value. Conversely, it may be a good time to sell silver when the ratio returns to a more typical range between 40 to 60.
For example, after extreme highs like those in the 1930s or 2008, waiting for the gold-to-silver ratio to fall below historical averages has often led to the best returns. In both of the bull market peaks in 1980 and in 2011, selling silver when the ratio dropped below 40 to 1 proved very profitable. Nevertheless, the right timing depends on global demand and economic trends as well, and it should never be used all on its own.
Final reflections
The gold-to-silver ratio has varied widely throughout history. From 2:1 in Ancien Egypt, to 15 to 1 set by Sir Isaac Newton in 1717. The numbers show how economies have valued these metals differently, depending on availability, cultural significance and economic importance.
Today the ratio often hovers between 50 to one to 80 to one. This wider gap reflects changing times. Gold is seen as a safe haven, while silver, being more common, is used more in insustry. While its traditional monetary demand is sleeping.
The gold-silver ratio serves as a crucial indicator of economic trends and investor sentiment. By understanding its movements and History, investors can capitalize on the many opportunities of the precious metals market. Whether used for short-term trades or long-term portfolio adjustments, the ratio remains a valuable tool in navigating gold and silver investments.
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