Before the adoption of the fiat currency system, national currencies were often backed by gold or silver. Indeed, it would often be fixed at specified exchange rates relative to units of national currency. These exchange rates would change based on the perceived economic strength of the nation in question.

For silver that number was below 260, more in line with coffee, cocoa and other consumed commodities. The Gold-Silver Ratio has been as low as 2.5 oz of silver to acquire 1 oz of gold (ancient Egypt). The Gold-Silver Ratio has gotten as high as over 100 oz of silver to buy 1 oz of gold in the 1930s as the US government forced US citizens to turn in their gold coin savings. For example, we will examine times the Gold Silver Ratio has fallen above or below its 20th and 21st Century averages or longer, which will show you in various longer-term Gold Silver Ratio charts below. The convergents of this continued fraction (2/1, 5/2, 12/5, 29/12, 70/29, …) are ratios of consecutive Pell numbers.

These fractions provide accurate rational approximations of the silver ratio, analogous to the approximation of the golden ratio by ratios of consecutive Fibonacci numbers. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor. Open a BullionVault account today and you can claim 4 FREE grams of silver to test our service for yourself at no risk or cost. Unlike most other commodities however, gold isn’t consumed when it is used, and because of its high value people rarely throw gold away or try to destroy it.

The Gold Silver Ratio is by far the most watched relative ratio measurement in precious metals investing. Scroll down to see the live Gold Silver Ratio as well as longterm charts of Gold Silver Ratio history. The difficulty with the trade is correctly identifying the extreme relative valuations between the metals. For example, if the ratio hits 100 and an investor sells gold for silver, and the ratio continues to expand—hovering for the next five years between 120 and 150—then the investor is stuck. A new trading precedent has apparently been set, and to trade back into gold during that period would mean a contraction in the investor’s metal holdings.

The gold-silver ratio measures the amount of silver it takes to equal an ounce of gold. The ratio remained fairly stable throughout most of history, starting to fluctuate in the 20th century. The practice of trading the gold-silver ratio is common among investors in gold and silver. The most common method of trading the ratio is that of hedging a long position in one metal with a short position in the other.

  1. A 2008 buy of 80 ounces of silver against a short sell of one ounce of gold would have resulted in a profit of $1,520 in silver against a loss of $550 in gold, for a net profit of $970.
  2. The bet is that the spread will diminish with time in the high-ratio climate and increase in the low-ratio climate.
  3. Traders can use it to diversify the amount of precious metals that they hold in their portfolio.

But the era of the fixed ratio ended in the 20th century as nations moved away from the bimetallic currency standard and, eventually, off the gold standard entirely. Since then, the prices of gold and silver have traded independently of one another in the free market. That’s because gold and silver are valued daily by market forces, but this has not always been the case. The ratio has been set at different times in history and in different places by governments seeking monetary stability.

Precious metals have a proven record of maintaining their value in the face of any contingency that might threaten the worth of a nation’s fiat currency. Because of the silver market’s size and volatility, speculative trading in the grey metal is much heavier than gold, relative to the physical market’s underlying value. Likewise, the three times the gold / silver ratio has fallen below 20 in the past, it has markeda period when gold was relatively inexpensive compared to silver. In terms of geologists, we find roughly 8-parts of silver to 1 part gold in the ground.

Gold Silver Ratio Potential Future Chart

Despite not having a fixed ratio, the gold-silver ratio is still a popular tool for precious metals traders. They can, and still do, use it to hedge their bets in both metals—taking a long position in one while keeping a short position in the other metal. When the ratio is higher and the 11 best growth stocks to buy for 2021 investors believe it will drop along with the price of gold compared to silver, they may decide to buy silver and take a short position in the same amount of gold. In 1913, the Federal Reserve was required to hold gold equal to 40 percent of the value of the currency it had issued.

What Is the Current Gold-Silver Ratio?

When relative valuations hit extremes and then revert to historicalmeans time and time again, we seek to buy these temporary undervaluations and wait for theirinevitable pendulum swing in the opposite direction. When the ratio has topped 80, it has signaled a timewhen silver was relatively inexpensive relative to gold. Of course, one doesn’t have to look far to find what may sound like ridiculous gold price predictions. Often many are arithmetically based on historical US dollar monetary base outstanding precedent. Every 50 years or so the US dollar issuance outstanding gets accounted for by Official US Gold Reserves. We believe we are on track for another historic beat down of the fiat US dollar by gold 2020s.

How the Gold/Silver Ratio Works

The primary reason the ratio is followed is that gold and silver prices have such a well-established correlation and have rarely deviated from one another. Many investors today feel the ratio should trade in line with the physical ratio of gold to silver in the earth’s crust. The availability of the the two metals certainly affected their relative prices in the past. Over the last half-a-century, gold has averaged a daily move of 0.5% up or down in US Dollar terms, but silver has moved more than 0.9%. That’s because silver is a much smaller market than gold by value, around one-tenth the size. So the same flow of cash, in or out, will hit silver prices much harder, and that will move its ratio to gold prices down or up.

Silver and gold’s historic monetary ratio has typically averaged around 16 has little if nothing to do with how they are valued today. Remember that silver has been divorced from the modern financial system since 1964. The ratio is important to investors as they trade it with the purpose of hedging certain metal positions as well as the ability to generate profits from their positions.

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