Gold:Silver Ratio

The gold to silver ratio is a measure of the relative value between gold and silver.

It refers to the quantity of silver that could be purchased with the same money it takes to buy one ounce of gold. For example, if the ratio is 50:1, then an investor could buy 50 ounces of silver for the same price as one ounce of gold. The ratio at the beginning of 2023 stood at around 85:1.

The gold silver ratio can be worked out simply by dividing the current gold price by the silver price.

The only rule to calculate this is that the basis of each price has to match. When calculating the ratio, ensure to use the same weight, currency and timeframe for each metal. So for example, divide the current spot price of gold in ounces in GBP, by the current spot price of silver in ounces in GBP.

It’s worth mentioning that this ratio doesn’t account for the difference in Value Added Tax (VAT) treatment towards the two metals. While investment grade gold is exempt from VAT, purchasing silver coins or bars is not. So if you’re using the gold to silver ratio as a tool to help with the optimum timing of a physical silver purchase, you will actually need to factor in this 20%, narrowing the ratio.

Electronic purchases of silver like an ETF or spread trading won’t be impacted by VAT.

The gold-to-silver ratio is influenced by various factors, and one of the key drivers is the industrial demand for these metals. Let’s delve deeper into how this works:

1. Silver’s Industrial Demand: Silver is a hot commodity in electronics, solar panels, and medicine due to its unique properties. When industries are booming and demand for silver goes up, silver prices can rise. If gold prices stay steady during this time, the gold-to-silver ratio decreases.
2. Gold’s Limited Industrial Use: Gold has fewer industrial uses. Its price, and therefore the gold-to-silver ratio, is more influenced by economic factors like inflation and uncertainty.
3. Economic Conditions and Industrial Demand: Broader economic conditions can influence industrial demand for silver. In a booming economy, demand for goods that use silver may increase, potentially pushing up silver prices and lowering the gold-to-silver ratio. Conversely, this demand could decrease in an economic downturn, leading to lower silver prices and a higher gold-to-silver ratio, especially if investors turn to gold as a safe haven.

Historically, gold has always been more valuable than silver. This is because gold is scarcer than silver, which impacts its supply/demand dynamic and, consequently, its price.

In the Roman Empire, the ratio was set at 12:1. Fast forward to the 15th and 16th centuries, the discovery of massive silver deposits in the Americas caused the ratio to rise. In the United States, the Coinage Act of 1792 fixed the ratio at 15:1.

The 20th century was a rollercoaster ride for the ratio, with peaks and troughs corresponding to major economic events. For instance, the ratio hit a high of 98:1 in 1939 during World War II.

In the 21st century, the ratio has mostly ranged between 50:1 and 70:1, with a notable peak of 104.98:1 in 2020 during the COVID-19 pandemic.

History has a way of teaching us valuable lessons, and the gold-to-silver ratio is no exception.

Economic uncertainty often sees a rise in the ratio as investors flock to gold as a safe haven. On the other hand, periods of economic growth often see a decrease in the ratio as demand for silver in industrial applications increases.

The long-term trends in the ratio reflect the relative abundance of the two metals. As new sources of silver and gold have been discovered, the ratio has adjusted to reflect these changes in supply.

In essence, the gold-to-silver ratio is more than just a number. It’s a historical narrative reflecting economic stability, supply and demand shifts, and investor sentiment. Understanding its historical context and trends allows you to gain valuable insights to inform your investment decisions.

The ratio has changed and evolved over the years, impacted by many factors, including demand, economic backdrop and sentiment.

Gold is often used as a value store and hedge against inflation. It is also used significantly in jewellery and in the electronics industry. On the other hand, silver is more plentiful and is often used in industrial applications, such as solar panels and electronics. 

This is due to silver being the most electrically conductive metal on earth. For this reason, silver is the preferred choice in mobile phone circuits, electrical switches and many other electronics.

The gold-to-silver ratio is not fixed and can vary over time. This is because the price of gold and silver is determined by supply and demand factors, which can change depending on economic conditions and investor sentiment.

When investors are optimistic about the economy and the stock market is performing well, demand for precious metals may decrease, leading to lower prices for gold and silver. Conversely, during economic uncertainty and market volatility, demand for precious metals may increase, driving up the prices of gold and silver.

Many ‘silver bugs’ will argue that the silver price will soar in the coming years as the new digital industrial age becomes increasingly entrenched. Silver’s many industrial and electronic applications will see demand for the metal soar, pushing up its price and narrowing the ratio.

This is supported by the notion that many uses of silver actually expire the metal; in other words, it cannot be used again. So unlike gold, the world’s supply of silver actually diminishes on a daily basis.

In conclusion, the gold-to-silver ratio is an important metric for investors in the precious metals market. It provides insight into the relative value of gold and silver and can help investors make informed decisions about their investments.

While the ratio is not fixed and can fluctuate over time, it remains a useful tool for investors looking to capitalize on the market dynamics of these two precious metals.