Over the past couple of months the gold-to silver ratio has climbing higher and faster than it has ever done in previous years, and everybody has been saying buy silver or buy gold. How did this happen and why should you care? First of all why does this ratio even matter?
The gold-to-silver ratio indicates the amount of silver (in ounces) it would take to purchase just an ounce of gold. If the number is small, it means that silver is performing better than gold and if the ratio is high, it means that gold is doing better than silver. Precious metal investors track the prices of these metals. To calculate what the ratio is, you simply need to divide the price of gold by the current silver price. This ratio can help you decide which precious metal you should be buying to maximize your returns.
Let’s look at the history of this ratio. Between 1792 and 1833 the ratio was 15/1. In 1939, the then U.S president Franklin Roosevelt set the ratio at 35:1. The idea was to have it stay at that point for a while but it has proven to be unpredictable. Since the late 1970s, this ratio has been going up so much so that it hit 100:1 in January 1991. However, two decades later the ratio had plunged to 38:1. Since March 1991 and 2019, the ratio has hovered around 50:1 and 70:1. And then 2020, came along. The markets reacted to the crises that were breaking out all over and the price of precious metals or gold in particular, skyrocketed and the ration reached unprecedented highs around March 2020, reaching 125:1. This meant that silver has become extremely cheap compared to gold.
When you buy silver, should the ratio even matter?
The answer to that is yes. It is a great indicator of the best time to buy silver at a cheap price and also an indicator of the market improvements. At the moment, there are a number of reasons why silver prices are where they are at, these include:
- Unstable Economic markets
- The weakening U.S Dollar
- Unstable equity markets
- Supply and demand and of course COVID19
Because of these factors, people are looking for safe havens to protect their wealth from financial risks. Gold is popular; however, silver is linked to gold, so a rise in gold demand also means that there is a rise in the market for silver. These aren’t the only factors driving the price of silver and gold. There are instances where the price of gold does not match the spike or depreciation of silver. Silver is an industrial metal, so when there is a slump in the industrial sector. The mining shutdowns that took place as a result of the COVID-19 restrictions affected the availability and the price of silver and its price.
What does this all mean?
Keeping track of the gold-to-silver ratio can help determine the best time for you to buy or to sell silver. A ratio of 80 to 1 is an indicator that silver is undervalued and that this might be the right time to buy and not to sell. Savvy investors include both silver and gold in their investment portfolios to cover all likelihoods.
In fact, despite the current high gold-to-silver ratio, some experts are optimistic about the long-term fundamentals of silver, particularly thanks to its various industrial uses.