Are you familiar with the gold to silver ratio?

If not, it’s an indicator that many precious metals investors watch to help them to decide when to buy and how to weight their holdings.

Of course, investors who use this ratio also pay attention to fundamental (and other) factors when making their decision.

And like every indicator—technical or fundamental—it shouldn’t be relied on as a surefire signal; instead, it helps to forecast possible scenarios, and by doing so, it helps investors strategize.

 

The “theory” behind the gold to silver ratio

 

  • When gold outpaces silver, both metals are falling yet investors are buying gold as a “safe haven.”
  • When silver outpaces gold, both metals are typically rising

 

 

Let’s take a look at how this played out over the last decade:

gold-silver-ratio-300x168 Here’s How the Gold to Silver Ratio Theory Works

Source: Valuewalk

The chart above illustrates the gold to silver ratio over the last decade. Note what happens at the extremes.

 

  • 2011: Silver topped at $50 per ounce at the exact ratio low of 31-to-1.
  • 2015: Both gold and silver bottom ($1,045 and $13.65 respectively) as ratio peaks at 80-to-1.
  • 2016: Gold and silver ($1,378 and $21.25) top as ratio declines to 64-to-1.

 

As of last week, the gold to silver ratio was at 80-to-1.

Take it or leave it, but that’s the theory, explained in the simplest way possible, of the gold to silver ratio.

 


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