Why Gold-Silver ratio is important

Akhil Nallamuthu BL Research Bureau | Updated on July 24, 2021

Gold-silver ratio, also referred to as mint ratio, is the relative value of gold with respect to that of silver. In simple terms, the ratio is calculated by dividing the price of gold by the price of equal quantity of silver. Suppose the price of per ounce of gold is $1,800 and the price of per ounce of silver is $25, the ratio will be 72 i.e., $1,800 divided by $25. That is, with one ounce of gold, you can purchase 72 ounces of silver. This ratio can vary every day as the price of gold and silver continues to fluctuate. If gold outperforms silver, the ratio will go up and vice-versa. Since it captures the relative value, the ratio can vary even if gold and silver move in the same direction.

The reason for us to look into the ratio is that it can provide a clue as to which among the two precious metals is likely to perform better going forward. For instance, the ratio is currently at around 72 and historically it is near the base of 64, which is the lowest since 2014. While 80 to 84 has been the highest levels for most part of the last decade, the ratio skyrocketed to 117 in March 2020 as gold price zoomed. But as gold underperformed silver, the ratio gradually declined towards current level of 72. So, now the ratio is near the base levels and has more room on the upside, and this means, gold can outperform silver.

Though it can be a good tool to decide to go overweight on gold or silver, do note that the ratio may remain at extreme levels for a prolonged period of time. Thus, it should not be used in isolation.

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Published on July 24, 2021

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