The Gold-Silver Ratio
The gold-silver ratio simply divides the price of gold by the price of silver, and traders watch its swings as a rough gauge of relative value between the two metals, even though the ratio itself has no fixed "correct" level.
The gold-silver ratio is simply the price of an ounce of gold divided by the price of an ounce of silver. It has no economic law fixing it at any particular level, but traders watch it as a rough gauge of relative value: a historically high ratio means gold is expensive relative to silver by past standards, and some traders use extremes in the ratio to bet on it reverting — buying the relatively cheap metal and selling (or simply avoiding) the relatively expensive one.
The gold-silver ratio is a relative-value signal, not a valuation formula — it has ranged from under 20 to over 100 over the past century, and a high or low reading only says the two metals' prices have diverged from their own recent history, not that either is objectively mispriced.
Worked example
Gold trades at $2,000/oz and silver at $25/oz, giving a ratio of 2,000 / 25 = 80. If the ratio's 20-year average is closer to 65, a trader who believes it will revert might buy silver and sell (or short) gold, expecting silver to outperform gold as the ratio falls back toward 65 — though nothing guarantees it will, since the "average" is descriptive history, not an anchor either metal is bound to return to.
Part of why the ratio swings so much is that silver has a bigger industrial-demand component than gold, which is overwhelmingly held as a store of value — so a manufacturing boom or bust can move silver noticeably more than gold, pushing the ratio around for reasons that have nothing to do with either metal's role as a monetary hedge.
Practice in interviews
Further reading
- CPM Group, Silver Yearbook