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Gold to Silver Ratio

What is the Gold-to-Silver Ratio?

The Gold to Silver Ratio, sometimes called the Silver to Gold Ratio, is a simple concept. It is the dollar amount of Silver, in ounces, it takes to purchase one ounce of Gold. However, behind that simple definition is a complicated theory. Adherents to this theory believe when the Gold to Silver Ratio is high, it is “Silver friendly” so they want to sell Gold and buy Silver at its relatively lower Silver spot price. When the ratio moves to the lower end of its range, it is “Gold friendly.” That is when those who ascribe to this philosophy will sell Silver to buy Gold because it means Gold is the less expensive Precious Metal investment, relative to Silver.

At this point, the topic can become convoluted. As with many details relating to the Gold to Silver Ratio, the science is difficult to bear out. This theory’s lengthy history means there has been plenty of time for mathematicians or economists to prove a positive correlation, but no one has. The same criticism could be leveled at many popular techniques and “rules of thumb” used in contemporary technical analysis. Proponents claim the Gold to Silver Ratio can be a predictor of which Precious Metal is the superior investment at a given time and the thinking behind the theory is that at certain times Gold is overpriced relative to the Silver spot price while at other times Gold is undervalued in relation to Silver. If this is accurate, it presents an important corollary. It should allow an investor to liquidate one metal when it is overpriced and invest the liquid capital in the under-priced metal to their advantage. The theory is that if the investor timed their Precious Metal transactions perfectly, their net ounces held would increase without spending any additional money.

Are There Ratio Opportunities in the New Era of Precious Metals Investment?

Over the past 10 years, Gold enjoyed record-high values as investors sought security against the banking crisis. Many of those Gold investors liquidated their holdings when the immediate financial peril passed, creating volatility. Silver spot price, too, was volatile at that time, based both on investor demand and rumors of shortages. This volatility may have been a factor in creating the “all-in” or “all-out” investor that is so common in the United States. It is important to remember what Gold and Silver do best is demonstrate the public trust in fiat paper money. When trust in paper money falters, it creates market volatility.

Has the time come to revisit the theory of the Gold to Silver Ratio and perhaps reintroduce it to the everyday Precious Metals investor?  Having questions about a complicated theory doesn’t mean that theory is wrong, per se. It is easy to conclude coin dealers in previous eras adhered to the Gold to Silver Ratio because it was good for business, but one might also intuit a fundamental relationship between Gold and Silver as part of the natural order. If this were accurate, wouldn’t many more people use this theory for their own financial gain? These investment questions are an extension of the technical versus fundamental analysis of Precious Metals markets. The repeating chart patterns in technical analyses are useful in talking about what the market might do in the future. The fundamentalist approach discounts technical analysis, viewing charting as busywork that merely expresses the beliefs of the analyst. The question remains: Is there a correlation between technical analysis and price patterns, or are positive results created because of self-fulfilling prophesies? In other words, do so many people act on a certain pattern that the anticipated outcome is a foregone conclusion?

Knowledge is Power, Not a Crystal Ball

The Gold to Silver Ratio, like any other technical trading data we might examine to help us make investment decisions, is theoretical and therefore fallible. This discussion of it is presented for informational and educational purposes only. The Silver to Gold Ratio is a fascinating possibility for Precious Metals investors, but acting on it is best done only after you have researched further and consulted your financial advisors.

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