The gold silver ratio (GSR) is calculated by dividing the current value of an ounce of gold by the current cost of an ounce of silver.
It’s an easy numerical formula that indicates how many multiples of gold are trading at the price of silver, a popular metric among precious metals used by investors globally.
What is the Gold to Silver Ratio?
The Gold/Silver ratio quantifies the relative strength of gold and silver prices. It illustrates how many ounces of silver are required to buy one ounce of gold. Divide the current gold price by the current silver price to reach this figure.
This yields the Ratio, which is a simple way to determine which of the two primary precious metals is increasing in value compared to the other.
Some experts, dealers, and investors prefer to “trade the ratio,” purchasing silver when the ratio increases and switching back to gold when the ratio falls. Kanak House Bullion makes this simple, quick, and affordable.
How to Trade the Gold-Silver Ratio
Trading the ratio of Gold & Silver is an activity primarily done by gold and precious metals traders, who utilize the ratio to change their holdings when the ratio swings at historical extremes.
If a trader owns one ounce of gold and the ratio increases to 100, the trader will exchange one ounce of gold for 100 ounces of silver. If the ratio falls to the other extreme of 50, the trader will sell 100 ounces of silver for two ounces of gold.
Using this approach, traders can acquire metal while looking for high and low ratio figures to boost holdings.
- Open an account to begin trading on the price movements of gold and silver. You will be automatically provided access to a free demo account where you can practice trading the gold and silver ratio.
- Choose whether you want to spread bet or trade CFDs. These are the most common derivative instruments used in precious metals trading that you should be familiar with.
- Keep in mind that spread betting and CFDs are leveraged products with a significant chance of loss. Look through our safest Bullion Platform.
What is the Average Ratio of Gold to Silver?
The average price ratio between the two precious metals in the modern period is nearly 55:1, as it was at the start of 2020. The highest recorded value was in 1990, and the least in 1979.
In the past, when the ratio is below its average, silver is seen as cheaper than gold, and when it is above its average, silver is seen as expensive.
Throughout 2020, risk aversion across all asset classes has pushed the price of silver to its lowest level since 2009, falling below $12 per ounce, sending the ratio to a new all-time high.
Gold to Silver Ratio Chart
The gold-to-silver chart representation illustrates whether gold is generally underestimated and overestimated in comparison to silver
- Upon calculation, when the derived result is low (for ex. 50) gold is considered cheap in comparison to silver.
- Upon calculation, when the derived result is high (for ex. 80) gold is considered as expensive in comparison to silver.
Silver stacking: The 80-50 switching rule example
Gold Oz brought for USD 304, in January 1985 would be worth by January 2023 using:
- Straight Gold Holding: 1,204 USD x 1.0 Oz = 1,204 USD (3.96 x investment)
- The 80-50 Switching Rule: 1,204 USD x 4.9 Oz = 5,899 USD (19.4 x investment)
Previous achievements do not guarantee or provide a prospective return, but the rule and regulation for switching to the relatively unappreciated metal is a traditionally comprehensive strategy.
Gold is intended to multiply your precious metal possessions by switching to the underestimated metal
- This rule for calculation purposes implies switching to the precious metal silver once the ratio hits around 80 and back into gold once it hits around 50.
- From 1985, the 80-50 rule would have occasioned barely in 7 trades (one every 3 to 5 years) consequential in 1 gold Oz to turn into about 4.9 Oz (or silver equivalent).
- The switching rules intend to achieve lesser worth risk as they help to switch out of precious metals which increase unequally fast providing less unpredictable and advanced results down the line.
Why is the Gold to Silver Ratio so High?
The gold-to-silver ratio isn’t always favorable. It changes over time, based on many circumstances, and it can be fairly low.
Generally, it is high because there is greater demand for silver than for gold across the world. Silver usage is more common than gold usage.
Final Thoughts
Take a basic mathematical calculation and track previous price behavior; this is the best smart investing technique.
When relative values reach extremes and then revert to historical norms, we look to buy this transitory undervaluation and wait for the pendulum to swing back in the opposite direction.
