Chances are, most ASX investors who buy and sell shares on our markets have never heard of the gold-silver ratio.
But if you're a precious metals investor or enthusiast, you've probably heard of this metric.
Its use in our modern world is quite subjective. Some investors may view this ratio as a relic of the past, while others might see it as one of the most useful metrics for buying gold and silver as investments.
So today, let's dive into what the gold-silver ratio is telling us right now.
What is the gold-silver ratio?
The gold-silver ratio is, well, what it says on the tin. It is a remarkably simple metric that merely tells us how many ounces of silver it takes to buy one ounce of gold at any given time.
If one ounce of gold costs $1,000 and one ounce of silver costs $20, then the gold-silver ratio would be 50, meaning 50 ounces of silver is worth one ounce of gold.
As gold and silver have been investments for hundreds, if not thousands, of years, investors can use this ratio to assess whether gold is relatively cheap or expensive compared to silver and vice versa.
Decades ago, governments used to set the ratio themselves, as both precious metals were part of many countries' currency frameworks.
Today, it is a completely private affair. Although gold and silver are both precious metals that investors favour as 'real money', their prices don't always move in tandem these days. Silver is an industrial metal as well as a precious one, and it has many uses in electronics, healthcare, water filtration, and window coatings.
Gold, on the other hand, has relatively little industrial application. Approximately 90% of annual gold production is used in jewellery or investment-grade bullion.
This means that the silver price is far more susceptible to the economic cycle than the gold price, indicating that the gold-silver ratio is volatile.
Investors have often taken advantage of this fact, most famously Warren Buffett in the late 1990s. In 1997, Buffett purchased 111.2 million ounces of silver when prices were low. He promptly made a US$97.4 million profit when the metal's value returned to its historical average.
What does this ratio tell us today?
According to goldprice.org, the gold-silver ratio has averaged around 60 over the past 50 years. That's 60 ounces of silver to one ounce of gold. Over the past 20 years, the average has been higher, around 70-75.
Today, the ratio is approximately 88.7. That's based on a gold price of US$3,034 an ounce (pretty much at an all-time high) and silver at roughly US$34 an ounce.
With the ratio so far above its long-term averages, this tells us that either gold is expensive relative to its historical average, or else that silver is cheap. Or perhaps a bit of both.
As such, history would tell us that selling gold bars (or investments) to buy silver wouldn't be a terrible idea right now. If you believe in the gold-silver ratio, that is.
