A High Gold-to-Silver Ratio & Your Future | U.S. Money Reserve

By John Rothans, Chief Procurement Officer of U.S. Money Reserve

The gold-to-silver ratio is at a near-record high-higher than it has been in many years. How did it get there, and what does it mean for you? U.S. Money Reserve gives you insights and details to help you better understand how silver and gold prices are performing and what their performance could mean for you.

What Is the Gold-to-Silver Ratio?

The gold-to-silver ratio calculates how many ounces of silver it takes to buy an ounce of gold. A smaller number can mean silver is outperforming gold; a bigger number can mean gold is outperforming silver.

By tracking the prices of the two precious metals, you can compute the ratio-simply divide the price of gold by the price of silver. Calculating the ratio can help you determine when to buy gold or silver and which metal to purchase.

The ratio has historically fluctuated. The U.S. government set the ratio at 15:1 from 1792 to 1833. It rose to 16:1 in 1834. President Franklin D. Roosevelt set the ratio at 35:1 in 1939. But in 1944, the ratio dropped back to 15:1.

Since 1979, the ratio has been on a mostly upward trajectory. Looking at the past four decades or so, the ratio hit its rock-bottom point of 15:1 in December 1979. But by January 1991, the ratio had soared to 100:1. A little over 20 years later, in March 2011, the ratio had plunged to 38:1. For most of the past two decades, the ratio has ranged from roughly 50:1 to 70:1.

In recent times, the ratio has risen steadily. In early May 2020, the ratio skyrocketed to around 115:1, down from a record high of 125:1 in March 2020. Based on the current ratio, silver is considered inexpensive relative to gold.

If the current rally in the gold-to-silver ratio is like the one in 2008, amid the Great Recession, a ratio of around 118:1 could be in the cards.

Why Is the Gold-to-Silver Ratio So High?

A number of factors have driven up the gold-to-silver ratio. Here are five of them:

  • Economic uncertainty
  • Low interest rates
  • Instability in the equity markets
  • Low U.S. Treasury yields
  • Weakness of the U.S. dollar

Against this backdrop, a lot of people are seeking a safe haven for their assets and a hedge against financial risk, and many of them have turned to gold. Fast-paced gold demand has helped push up the price of gold and has triggered never-before-seen gold-to-silver ratios.

The Wall Street Journal further explains that the price of silver has not matched the recent spike in the price of gold because depressed industrial demand for silver has outweighed shifts in the gold market. In addition, recent mining shutdowns have hurt silver production.

What Does a High Gold-to-Silver Ratio Mean for You?

Keeping on top of the gold-to-silver ratio can help you identify a time you feel best about buying precious metals and whether to buy gold or silver.

Mickey Fulp, a certified geologist, says the gold-to-silver ratio “lends valuable guidance” when you’re trying to pinpoint how gold and silver are performing in the market in relation to one another. A ratio above 80:1 “is evidence that silver is severely undervalued and is a strong buy signal for the metal,” Kulp says.

Although silver functions mostly as an industrial metal, Kulp says, “It is strongly tied to the price of gold and is generally more [sensitive] during upside and downside moves of the yellow metal. In times of financial distress and economic calamity, silver tends to behave more like a precious metal with widespread [buying] of gold trickling down.”

Kulp does note, though, that gold serves as his “safe haven and insurance policy against financial calamity.”

One Seeking Alpha contributor, Oyat Advisors, writes that they traditionally include precious metals in their asset allocation, representing nearly 25% of liquid assets. Thus far, the financial management firm has focused solely on physical gold for its metals allocation, but now it’s looking at complementing physical gold with a small amount of physical silver.

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.

Patrick Heller, a numismatist in Michigan, even made the case in March 2020 that the long-term price of silver could outpace the long-term price of gold “by well over two times from where [it is] at today.” He believes current ratios don’t accurately reflect the market for physical gold and silver.

In fact, Kitco contributor Phillip Streible believes that silver will shine as a “leader” and that the gold-to-silver ratio could decrease “because of an outpacing increase in silver prices.”

Gold-to-Silver Ratio FAQs

Q: What Factors Influence the Gold-to-Silver Ratio?

A: Typically, the ratio is impacted by what happens to gold more than silver. Factors that influence the ratio include:

  • The profitability of mines and growth of mining supply. Changes in production at mines affect the prices of gold and silver.
  • The fluctuation of interest rates. Gold prices tend to move more than silver prices when interest rates change. For instance, gold usually benefits more than silver does when interest rates go down. But when interest rates go up, silver might outperform gold.
  • Industrial uses for these metals, particularly silver. Silver winds up in more industrial products than gold does. For instance, silver is one of the components of solar panels.

Q: What Is a Good Gold-to-Silver Ratio?

A: There is no such thing as a “good” gold-to-silver ratio. (In October 2020, the ratio was 79.5:1).

When the ratio rises, the price of gold is higher, so you’d need more ounces of silver to buy one ounce of gold. A high ratio can mean that silver is a relative bargain buy. Therefore, it could be an excellent time to buy silver because the price is down. A lower ratio can mean the reverse: Gold might be more affordably priced, and you may want to buy gold while the price is relatively lower than it would be at a higher ratio.

Because the gold-to-silver ratio changes so often, it can be hard to make long-term decisions based solely on that number. Instead, consider using the ratio as one of the many data points you consider when buying gold or silver.

Q: Will Silver Ever Cost More Than Gold?

A: The price of silver tends to climb at a higher rate than gold prices.

“During bull markets for both metals, fleet-footed silver often ascends faster than its heavier, more expensive cousin,” notes Ned Naylor-Leyland, precious metals fund manager at Jupiter Asset Management.

That said, it’s highly unlikely that the price of silver ever would eclipse that of gold. Why? In part, that’s because there’s such a huge gap between the price of gold and the price of silver. In late November 2020, the price of gold stood near $1,840/oz., while the price of silver sat close to $24/oz. Another factor that tends to curb the price of silver: More silver has already been mined worldwide, and more silver is available to yet be mined than gold.

Q: Why Is the Price of Silver So High?

A: This is a common question, but calling the price of silver “high” is subjective. As of November 24, 2020, the gold-to-silver ratio was about 77:1. That ratio is on the high side if you compare it to the last two decades, during which the ratio ranged from roughly 50:1 to 70:1.

Simply put, there’s more demand for silver than there is for gold in the industrial world. That demand has helped lift the price of silver. As the economy rebounds from the 2020 recession, industrial demand for silver is expected to increase even more.

“Silver…has a much higher industrial component to it…and in an environment where we see the global economy recovering, that’s another reason to buy silver,” Michael Hsueh, commodities and foreign exchange strategist at Deutsche Bank, told CNBC.

Among the products where you’ll find silver are medical devices, solar panels, computers, cell phones, cameras, TVs, and microwave ovens.

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