The Gold-Silver Ratio
You don’t have to be a bullion market specialist to understand the simple gold-silver ratio. But you can take advantage of the ratio that has historically been one of the most reliable technical indicators of when to buy, sell, or swap silver and gold. The strong “buy” signal number is 80 or above, and recently the ratio has gone above 90! Add to this the fact that we are currently in a 19 year silver bull market, and you have the right numbers to start seriously profiting in silver.
The last time we saw the ratio sitting where it is now was back in 1993. What happened next made smart investors a lot of money. Most investors today are simply not aware of the importance of this ratio, and they are missing out on how undervalued silver actually is at this point in history.
For the optimists who are believers in technical data and are hoping to see silver back at its once record high of $50 an ounce, it is time to plan for the future. The good news is that the vast majority of investors still can learn about this historical price relationship and take advantage of what has the potential to be an incredible opportunity.
If you are someone in the majority of people who are serious about investing in silver, you can start learning today. As complicated as some people would make understanding this concept of the gold-silver ratio, you don’t need a degree in Finance or investments. What lies ahead in this article are the basics that will build a foundation that you can use for the future. These basics include:
- Achieving an understanding of the gold-to-silver ratio
- How the ratio has been historically defined
- Fluctuations of the ratio throughout history
- Projecting the future of the ratio
- Turning a profit from it
- The Ultimate Way To Profit From The Gold-Silver Ratio
Achieving a Better Understanding of the Gold-Silver Ratio
If you are someone who has Math-a-phobia, a general fear of math, you are not alone. But all you need to know is simple division to understand the gold-silver ratio number. Simply divide the price of one ounce of gold by the price of one ounce of silver. On June 28, 2019 the price of gold was $1,415 per ounce, and the price of silver was $15 an ounce. By simple division (you can use your calculator) the ratio is 94.33. This ratio will change with the prices of gold and silver tomorrow, but as we mentioned at the beginning of the article the number of June 28, 2019 is well above the 80 “buy” signal.
How the Ratio Has Been Historically Defined
Understanding the gold-silver ratio is very easy today compared to times in the past. Once upon a time, governments determined the price of gold based on their need to create a stable money supply. Whatever amount of gold was in the government’s treasury would be the determining factor of what the ratio would be set at. Historically, with few exceptions, gold has always been deemed to be more valuable than silver because it has been thought to be the rarer of the two.
Here is a short timeline of the gold-to-silver ratio:
- Circa 323 B.C. — 12.5, after the death of Alexander the Great
- Circa 300 A.D. — 12, set by government decree
- Circa 1900 — 15, a ratio that was globally used (Bimetallic Standard)
- 1980 — 17, the biggest year of the amazing surge in gold and silver
- 1991 — 100, this ratio blew up to an astonishing all time high
The ratio since 1999 has averaged around 60. What changed in 1991 was that market forces were more responsible for the ratio moving up and down. You need to remember the focus of the article is on when to buy silver or swap gold and silver. In 1991 you could get about 97 ounces of silver for every ounce of gold. For example, if you had $1000 to invest in early 1991 you could get around 277 ounces of silver or 2.86 ounces of gold when the gold-to-silver ratio was 97. During the Great Recession of 2007 the ratio briefly topped 80. In November of 2011 that ratio was almost half of 1991’s peak, at 51.
Using the Gold-to-Silver Fluctuations as a Long Term Strategy
Though the focus so far has been on buying silver, the best long term strategy is to swap both gold and silver at the right time using the gold-silver ratio. For those of you who believe that you should build up solid gold and silver portfolio, you can employ this ratio very wisely to increase your precious metals holdings. But the key to remember is that silver has always gained more than gold in value when calculating in percentages, so trading in your silver bullion for gold at the right time is a very useful strategic strategy.
Going back to the 1991 example, if you bought 277 ounces of silver you would have had $1000 worth of silver with the ratio at 97. Then when 2011’s high of $50 came around, your silver would have have increased to about $13,800(!) to buy gold with. When the price of silver rose, so did the price of gold. The ratio dropped to 51, while the price of gold went to an incredible high of $1,900 per ounce. After the smoke cleared you could have ended up with a whopping 7 ounces of gold in exchange for those 277 ounces of silver!
What is critical to realize when looking at these numbers is that it is the gold-silver ratio that indicates when you should buy or exchange. Because gold and silver are long term investments, you want to retain them in your portfolio as a hedge against inflation and other difficult economic times, and avoid selling them for worthless cash.
Projecting the Future of the Ratio
You can get very intense about following the gold-silver ratio numbers, but if you choose to be a more casual observer of the markets here are a few general suggestions. The price of silver will generally drop faster than the price of gold because silver is connected to many industrial processes. When the economy slows down, so does industrial production and with it the demand for silver. From another angle, if gold prices start to rise regardless of the economic state, the price of silver will rise faster based on the simple economic principle of supply and demand. In 1991, interest in silver bullion as an investment had declined, but by 2007 everybody was looking to profit from precious metals investments.
How You Can Potentially Turn a Profit
Now that you have the basic knowledge, the next step is to actively apply what you have learned. There are a number of different strategies that can be used to convert cash to silver — and silver to gold. Many of these strategies involve taking the simple gold-silver ratio and using it to predict the future of gold and silver prices. The times that the ratio exceeds 80 is when the opportunities arise.
You don’t need to wait for economic chaos to occur before you begin investing in silver. There are ETFs (Electric Trading Funds) which allow you to trade the numerical value of the gold-silver ratio. These are usually not recommended, as they do come at a price to your pocket, the costs and overhead can be expensive and definitely something to consider.
Another option is to open an investment account that offers both online and offline brokerage services. This allows you to buy shares of silver, which can rise in value based on the performance of the overall market. Like ETFs there are high-costs that accompany transactions, such as fees and commissions. Unlike owning shares of traditional corporate stock, these types of shares do not offer the pay out of any kind of monthly dividends either.
Physical gold or silver ownership, on the other hand, does NOT carry the potential counter-party risks of paper gold or silver products. Also, the fees associated with purchasing physical metals are very minimal.
So, while silver is extremely undervalued and the with the gold silver ratio being at all-time highs, our clients will continue to load up on this undervalued asset as much as possible. Then when that next big bull run takes off, and the ratio compresses again, we either trade the silver for gold or liquidate and take profits. It’s a win/win for everyone!
Disclaimer — The above information is provided for informational use and should not be used to make investment decisions for yourself or others. This is a matter of opinion, and any information contained in the above article is deemed reliable, but no warranties of authenticities are included. West Hills Capital cannot be held liable for incorrect or misleading information and is to be held blameless. It’s important to talk with a trusted financial advisor before you invest in silver or other commodity, as well as stocks, bonds, or any other investment types.
