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Gold and Silver Ratio – Technical Analysis of Precious Metals Prices

Published by Karl Martin Karus in category Precious metals on 09.12.2019
Gold price (XAU-SEK)
15 032,60 SEK/oz
  
+ 217,30 SEK
Silver price (XAG-SEK)
173,25 SEK/oz
  
+ 3,73 SEK

What is the Gold/Silver ratio and how to calculate it?

Gold/Silver ratio is a simple measure of how the two metals are performing against each other. It is the amount of silver one can purchase with one ounce of gold. If the ratio is 100 to 1, it means that at the current spot price, one can buy 100 ounces of silver for 1 ounce of gold. To get the current gold and silver ratio you need to divide the current gold price by the price of silver.

Here is an example (an example is made with prices as of 20191113)

Today’s Gold price: 14263 SEK/per ounce Todays Silver price: 165 SEK/per ounce

Calculation: 14263/165=86.44

The gold/silver ratio on November 13th, 2019 at the time of writing this article was 86.44

Why does the gold-silver price ratio fluctuate?

It is worth investigating why the prices of gold and silver do not move together, considering that both are precious metals and a safe haven for financial insecurities. There are several possible reasons why gold and silver prices do not move together. As with anything else, market prices for precious metals are affected by supply and demand. During recent years, the demand for gold and silver comes from different industries and different investments in different quantities. One would need to go deep into the numbers of sales of precious metals to different industries in order to understand it completely.

For example, in 2018, 50% of the demand for gold came from the jewelry industry. The second high demand sector was the investors’ community with 27%. However, the demand for silver came 57% from industry such as electronics, photography, solar panels, welding, etc. Only 21% was from the jewelry industry.

It is difficult to point out the exact reasons for the high gold/silver price ratio with so few examples. In the past approximately thirty years, the gold price has been on average 66 times higher than the silver price. Today, however, the ratio is 86.44 as calculated at the beginning of the article.

Is it only a matter of time before the silver price starts climbing?

Significance of the gold and silver price ratio and the investing potential

In 2019, we have seen a strong increase in the price of gold. The global economy is showing signs of slowing down which calls on central banks to retreat from rate hikes and think new ways to boost the economy. The easiest way to boost economic activity is quantitative easing by central banks, which can lead to accelerated inflation. During such times, investors generally seek protection in the form of safe-haven assets from gold and precious metals overall. In the past nine months, the price of gold has increased significantly. Generally, gold and silver prices move mostly in sync without much disparity. It brings us to the question: Why has the silver not risen in a similar way as gold for the same time period?

Gold/Silver historical ratio

  1. During the middle ages in Europe the Gold/Silver ratio was holding around 12-to-1 and the ratio was formalized at 15.5-to-1 under France´s bimetallic monetary standard of the 19th Century.
  2. When silver was demonetized in favor of a Global Gold Standard, the ratio spiked above 30 at the start of the 20th Century.
  3. The ratio averaged to 58.4 since gold prices were also unpegged from the monetary system in 1971.
  4. The highest Gold/Silver ratio was marked between the years of 1990 to 1993 when the ratio was just above 90. This lasted for approximately 237 days between those years. The gold-silver price ratio normalized to close to 66 in March 1994 from about 87 in March 1993. During the same one year period, the price of the silver (denominated in USD) went up by about 35%

We have a similar situation today, where the gold/silver ratio is at a high point.  Consequently, the ratio is expected to lower and this could happen in one of two ways:

  1. a significant increase in the silver price or
  2. a drop in the gold price

It is likely that an excellent opportunity is currently presented to buy silver, as the silver price could go up significantly in the days/months to come.

Conclusion

The gold/silver price ratio is expected to normalize to a lower level, either when silver price starts climbing higher or gold price starts to fall, because of lack of investor’s optimism, (which is highly unlikely given the current market conditions). If the silver price starts to climb and the ratio averages out at 66 again, the silver price would stabilize around the price of 22 dollars per ounce (30-35% increase).

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Sources:
Bullionvault.com (https://www.bullionvault.com/gold-news/gold-silver-ratio-061220191)
LHV Bank (https://fp.lhv.ee/news/newsView?locale=et&newsId=5439730)

Disclaimer: This article is for informational purposes only and is not intended as an investment analysis or recommendation to sell or buy commodities. Tavex is not responsible for any decisions made based on this information. Investing is associated with opportunities and risks, and the market value of commodities can both increase and decrease. Past or future yields on the commodities and financial ratios shown above do not represent a promise or an indication of future earnings.

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