The Gold / Silver ratio enables to know the value of silver compared to gold, and vice-versa. It is simply the amount of silver it takes to purchase one ounce of gold.
Watching the the gold to silver ratio is a good strategy to follow when trying to accumulate either gold or silver. For instance, it enables to know how many ounces of silver you need to exchange for one ounce of gold.
Why the gold – silver ratio is important?
The Gold / Silver ratio can be used as an indicator to look out for changes in the gold and silver markets. Investors mostly use this ratio to decide when to sell one metal to buy the other. It is an important index to track by any trader or investor in the precious metals market. In fact, it enables to assess what is the best time to buy or sell gold and silver.
According to experts, the gold – silver ratio might potentially go up because of scarcity of silver. In fact, the silver supply is becoming more limited and therefore difficult to satisfy the industrial demand. The production of silver from mining is going down overtime, and silver might potentially increase its value, and therefore become a valuable investment.
How to calculate the gold – silver ratio?
You can calculate the gold – silver ratio by dividing the gold price (per oz) by the silver price (still per oz).
gold price today : £1,143.63
silver price today : £13.14
Gold / Silver ratio = 1,143.63 / 13.14 = 87.03
We can interpret this result as follow : today at the current gold and silver prices, you need around 87 ounces of silver to buy one ounce of gold.
Or in other words, you can exchange 87 silver britannia by a gold britannia.
How to interpret the Gold / Silver ratio?
Because of the difference of price between gold and silver, it is relatively easy to state that gold has a greater purchasing power than silver. Although this has always been the case historically, the value of gold has not always been greater to the same proportion.
A relatively high ratio indicates that gold has a strong purchasing power, or silver is relatively low in value.
On the other hand, a low ratio, means that either gold is undervalued, or the value of silver is going up compared to gold. Therefore, the silver price is getting closer to the gold price.
An example of the Gold / Silver ratio.
The gold and siler ratio arise when there are fluctuations. However, gold and silver trade mostly in sync nowadays, without a lot of shifts or variations. However, when the ratio drops to high or low levels, it indicates trading opportunities. For instance for a ratio of 100, an investor could sell its ounce of gold to buy 100 ounces of silver. In this scenario where the ratio is high, silver becomes more favourable to buy, because relative to the ratio, silver is somewhat inexpensive (undervalued).