I have used the Gold to Silver ratio countless times over the past 16 years to help me determine the best way to allocate my funds to precious metals. I have found it useful in identifying trends as well as setting expectations with respect to price development.
But the Gold to Silver ratio has major limitations and, in my opinion, I think it gets overused by Gold & Silver investors / stackers. So, let me please explain:
- What I think the GSR is good for.
- What I wouldn’t the GSR for.
- How I use the GSR when planning purchases.
- What I think about trading the GSR in search of growing my investment / stack.
Article on gold & silver price consolidation period from Kitco News:
https://www.kitco.com/news/article/2024-06-19/gold-and-silver-caught-prolonged-consolidation-prices-will-head-higher-saxo
What Is The Gold To Silver Ratio?
To start, it is only appropriate to introduce the gold to silver ratio (also known as the GSR) so everyone has a clear understanding of what it is. How the gold to silver ratio is calculated is like this:
Find reliable Gold & Silver price data here from Trading View:
https://www.tradingview.com/symbols/XAUUSD/
https://www.tradingview.com/symbols/SILVER/
There is a lot of disagreement amongst experts today as to whether this measure between metals is still relevant in the 21st century. Here are some examples of different opinions as they relate to the GSR:
- Some argue that the ratio today is proof of how undervalued silver is in relation to gold.
- Some argue that the current ratio suggests gold is overpriced and due for a downward correction.
- Others argue that the ratio is no longer relevant citing a clear shift towards gold as the preferred monetary metal and store of value.
Link to a YouTube Video where I presented the above data and discuss it in deeper detail:
https://www.youtube.com/watch?v=hMBf3cHPvAY
An objective truth is very difficult to come to, but there is enough evidence to make some conclusive statements for people looking to use this indicator in the 21st century.
What Is The Gold To Silver Ratio Good For?
From my point of view, the Gold to Silver Ratio is a great “local top” indicator for the prices of precious metals. What do I mean by local top? What I mean is that when the GSR hits certain levels, it is a sign that precious metals prices are likely poised for a pullback. How can I tell? More often than not, when we see a major drop in the gold to silver ratio (meaning the price of silver grows much quicker than gold), it is fueled by a runup in price for both gold & silver and usually followed by a period of price weakness.
Link to Gold to Silver Ratio chart from Macro Trends:
https://www.macrotrends.net/1441/gold-to-silver-ratio
Why do I think this indicator works? The main reason is because of the speculative nature of silver. Silver is of course real money, and an increasingly important industrial ingredient in the 21st century. I am bullish on silver over the long-term! That said, in a metals bull market I have observed the following events (in order) leading to a top before a pullback:
- Gold price rises as “big money” investors move into gold as a hedge to inflation / uncertainty.
- As gold picks up momentum, regular retail investors move into the cheaper of the 2 monetary metals (silver) due to affordability & speculative return.
- These waves of retail speculation result in larger and faster moves up in the price of silver.
- As the GSR moves down significantly (usually below 50), “big money” investors have already allocated their money and retail investors are running out of new money to invest in metals.
- High prices give an incentive for speculators to sell for fiat currency profits.
- Prices pullback or stagnate for some time.
How I Allocate Cash Savings Into Metals Based On The Gold To Silver Ratio
Apart from using the GSR as a market top indicator, I reference the ratio when allocating my cash savings to precious metals. Before I explain how, please keep in mind that my strategy for saving in precious metals is a long-term plan where I convert cash into metals over time. That is why I use the Dollar Cost Average (DCA) approach when purchasing gold & silver (because I see it as a long-term savings mechanism).
More on the Dollar Cost Average strategy from Investopedia here:
https://www.investopedia.com/terms/d/dollarcostaveraging.asp
How I incorporate the Gold to Silver Ratio into my Dollar Cost Average strategy as follows:
- When the GSR is above 80 (meaning 1 ounce of gold is equal or greater than the price of 80 ounces of silver) I try to purchase roughly 20 to 40 ounces of silver for every ounce of gold. I think as someone gets older; they should buy at the lower level of that range. For younger stackers (below 35 years of age); buying at the higher end of that range may make more sense (especially for younger people on a tight budget as I once was).
- When the GSR is below 60, I try to purchase roughly 10 ounces of silver for every ounce of gold. Considering that pullbacks below 50 usually signal a top in the price of precious metals (as demonstrated above), slowing down silver purchases in that range is a more prudent way to stack as far as I’m concerned.
What SHOULDN’T the Gold To Silver Ratio Be Used For?
The main mistake I see many silver investors & stackers make is they point to their preferred gold to silver ratio and say – “that’s the real ratio, so I’ll assume the price of silver will move up to that ratio versus the current price of gold”. Doing that, many people begin to plan their financial strategies or retirement around numbers that are purely theoretical. This is not only a poor way of using the gold to silver ratio, it can also be hazardous to one’s financial security!
More on precious metals reserves & mines amounts in history from the Royal Mint here:
https://www.royalmint.com/articles/invest/how-much-precious-metals-exists-on-earth-and-how-much-has-been-mined/
This type of thinking, in my opinion, is flawed and extremely 1-dimensional. What do I mean by that?
- It does not factor in the possibility that gold is overpriced or overvalued by the market.
- It assumes gold & silver are equal in every way, therefore value can only be separated by supply / scarcity.
- It leaves out key trends such as Central Bank purchasing preferences (gold as a Tier 1 asset), industrial usage, cultural practices, etc.
- It gives too much relevance to historical norms that were agreed on by people for various reasons that have little relevance in the 21st century.
Does that mean I think the current Gold to Silver ratio is useless in examining price potential for silver? No, it doesn’t! I think it’s fair to look at the Gold to Silver ratio to build models and expectations of where prices may go. What I am saying is, we should use observed GSR ranges since 1971 (when the USA officially abandon the gold standard) as a guide based on averages and trends within that data set. What we shouldn’t do is defer to out of modern context ratios that have nothing to do with the real long-term macroeconomic picture.
The best example I can think of to illustrate what I mean by that is this – Elon Musk and I are both human beings. We are at a ratio of 1:1 as we both exist as single individuals on planet earth. That does not mean our value is the same. Believe me when I say that Elon Musk is much more valuable to the world than I am (sorry mom)! The same applies to gold & silver. Just because they may come out of the earth at a ratio of 8 to 1, we should not assume any value based on that ratio.
Investopedia article on why humans value gold so much:
https://www.investopedia.com/articles/investing/071114/why-gold-has-always-had-value.asp
So, What Is A Realistic Gold To Silver Ratio In My Opinion?
Based on observed trends and performance since 1971 (considering that 47 is the average GSR of the 20th Century), I think a GSR of 40 to 60 is a realistic level we may see more often over the next 20 to 30 years.
Link to Gold to Silver Ratio chart from Macro Trends:
https://www.macrotrends.net/1441/gold-to-silver-ratio
Does It Make Sense To Trade The Gold To Silver Ratio Based On The Expectation Of It Falling?
Remember, physical metals come with premiums. Without premiums, it would be very difficult to purchase metals because there would be no incentive to start a business that sells them. So, let me start by saying we should not demonize sellers that provide metals at reasonable and fair premiums.
That said, those very premiums make it difficult for physical metals investors / stackers to “play” or trade the gold to silver ratio. Why is that? Because you pay premiums one way when buying the metal, and when it comes time to trade, you sell back for cash (close to spot) and buy once again at a premium. Paying the premium twice significantly eats into any tangible “profits” you may have expected to benefit from.
Link to a great video by my friend 2is1 on the topic of trading the Gold to Silver Ratio:
https://www.youtube.com/watch?v=TIvTm-h1Djw
Of course, it doesn’t mean it’s impossible to trade based on the GSR, it just means that it may be a more profitable trade in the paper market than in the physical metals market. For that reason, instead of planning trades based on the GSR, I think it’s best to plan your purchases around the GSR (as touched on above) to get the best value for your hard-earned cash.
Final Thoughts
The gold to silver ratio is an analytical measure as old as gold & silver money itself. Although I think it is a relevant tool in the 21st century, I think most people use it incorrectly or with false expectations on how to gain from it.
The world is a complex place and there are many factors that impact the US Dollar prices of gold & silver independently of each other. So, although I encourage people to use the ratio to strengthen their understanding of precious metals price performance, I also encourage them to look beyond that single indicator to get a fuller picture of what is really happening.
