Gold to Silver Ratio: Where We Are Today

August 22nd, 2011 by

From our website: A look at where we now stand with the gold to silver ratio.

Friday, August 19, 2011

One of the most common ways to measure the relative value of silver has been by looking at the price ratio of a troy ounce of gold to a troy ounce of silver.  Currently this ratio is 44.9 ($1,824.55/$40.64).  The average for the gold silver ratio over the last 10 years is around 58.

Below is a chart from that tracks the gold/silver ratio over the last 6 months.  As can be seen, the increase in the ratio corresponds with the CME’s decision in May to raise margin for silver futures contracts by 84%, and which caused silver prices to fall from just under $50 per troy ounce to around $32 per troy ounce.

From the 6 month chart, it would appear that the ratio could potentially be set to narrow, which would imply relative outperformance of the price silver relative to the price of gold going foward.  However, a look at the 2 year gold silver ratio chart shows that silver has dramatically outperformed gold in that period.

From August of 2010 to May of 2011, the price of silver rose from around $18 per troy ounce to just over $49 per troy ounce.  This represents a 172% return in just under 9 months.  Prior to this run, as can be seen, the gold silver ratio was an extremely high 67.  During this same period, the price of gold rose from $1,200 per troy ounce to $1,500 per troy ounce representing a much smaller, but still respectable 25% return.

This final chart takes a longer 10 year look at the gold-silver ratio.

It is notable to point out that, having fallen from a high of 80 to 50 between 2000 and early 2008, the gold silver ratio spiked above 80 during the financial crisis of 2008.  The recession that came in the wake of the U.S. mortgage meltdown caused silver prices to plunge, briefly falling below $10 per troy ounce.  Gold prices also wobbled during this time as investors globally struggled to raised cash.  However, gold prices proved much more resilient and much less volatile.

All three charts can be interpreted differently.  The 6 month chart suggests that the gold silver ratio is set to decline following the CME induced sell-off in silver.  The two year chart suggests that gold-silver chart could be set to rise given the huge relative outperformance of silver over gold.  Finally the 10-year chart suggest that downward trend in the gold silver ratio could be set to continue following the upheaval during the 2008 financial market meltdown.

While there is no definitive way to interpret the action of the gold silver ratio, it is useful to understand where we’ve been.  The market for both gold and silver has transformed signficantly during the past decade.  Increasing demand for physical gold, the rise of gold ETFs and the re-emergence of signficant central bank buying for gold has led to a resurgence in investment demand for gold.  Meanwhile, increasing demand for physical silver, the rise of silver ETFs, and increasing industrial demand for silver has seen a similar increase in demand for silver.  What this all means for the gold silver ratio remains to be seen.

For those that may be wondering, the gold silver ratio reached a low of 14.01 in 1980 when the Hunt’s brothers made an attempt to corner the global silver market.