For experienced investors, the gold-to-silver ratio is an indicator used to determine the right time to buy or sell their gold and silver investments.
What is the Gold-to-Silver Ratio?
The gold-to-silver ratio is the amount of silver it takes to purchase one ounce of gold. Investors use the fluctuating ratio to evaluate the relative value of silver, which determines if it is a good time to purchase gold or silver.
How do I Calculate the Gold-to-Silver Ratio?
To calculate the ratio, simply take the price of gold, divide it by the price of silver and you have the gold-to-silver ratio. For example: 722.67 (gold price) / 9.30 (silver price) = 77 (gold-to-silver ratio).
What Does this Mean?
Investors who trade in gold and silver bullion scrutinise the ratio to evaluate whether it is the right time for them to buy or sell a particular metal. The higher the ratio, the more silver is favoured relative to the ratio, silver is cheap. A low ratio may signal that it’s a good time to buy gold. Some experienced investors trade their silver for gold as the ratio lowers.
How Much Does the Ratio Fluctuate?
If you look back in history to 1687 (the oldest records available) the gold-to-silver ratio has swayed between 14 and 100 but was stable at around 16 for centuries.
The ratio fluctuates over time, since 2000 the gold-to-silver ratio has mostly traded between 45 and 80 but averaged around 55. Currently, in June 2016, the ratio is at 74.33 with the price of silver being high.
What Does this Mean for the Future?
Many experts in the silver community believe that the ratio should stand at and will return to 16:1, which is the pre-1900 average. In order to reach this ratio, the silver price would need to rise to approximately £47 per ounce. However, some would argue that the ratio could fall further due to the fact that nine times more silver is currently mined than gold.
The Bottom Line…
The gold-to-silver ratio is one of several valuable tools used to determine the best time to buy gold or silver bullion. However, it is wise to avoid making any hasty decisions. Even the most experienced investors can suffer errors in judgment when using a short-term view in order to make a profit.
With a little patience, some research and a long-term view, you may decide to buy silver when the ratio is high – buying in higher quantities with fewer pounds.
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