The gold to silver ratio is a measure frequently used to determine if gold and silver are over- or undervalued relative to the other based on the historical average of 15 to one, or 15 troy ounces of silver being equal to one troy ounce of gold. Because gold remains a form of money recognized universally, and because silver has been demonetized and is more abundant, nowadays the ratio has been skewed far higher than the historical average to about 80 to one, or 80 troy ounces of silver being equal to once troy ounce of gold.
Because the world’s supply of silver reserves is diminishing, and because silver has more uses as an industrial commodity than gold, many see the depressed price of silver as an opportunity to buy it at a cheap price. Today, for every ounce of gold that is mined, about 10 ounces of silver are mined. The ratio of mineable silver to gold continues to drop. Thus, the current elevated ratio is seen as unsustainable in the long run.
Silver and Gold Are Complementary
Though silver and gold may be distinct commodities, they have much in common and they need not be treated as mutually exclusive for precious metals buyers. Buyers of precious metals can buy both and take advantage of the benefits of both commodities. Buying both provides diversification and a hedge to market fluctuations.
Generally, silver is more volatile than gold in price, providing greater upswings and downswings during bull and bear markets, respectively. Thus, the next precious metals bull market is seen as potentially advantageous for silver investors, given the skewed price ratio between them. During the bull market top of 1980, the ratio fell to 20 to 1, or 20 ounces of silver being worth one ounce of gold. During the market top in April of 2011, the ratio fell to just over 30. However, during precious metals bear markets, silver tends to decline in price much more rapidly than gold.
Historically, silver has been more commonly used as money than gold precisely because it has been much cheaper than gold. In ancient Rome, a denarius, a silver coin approximately the size of a modern dime, was what a soldier earned for a day’s work. Most coins minted in the U.S. were made of 90 percent silver up to 1965. During precious metals bull markets, many investors flock to silver because they feel priced out of the gold market.
Still, gold has advantages despite lacking the perceived upside potential of silver. The gold price tends to be more stable, giving more peace of mind to conservative buyers. Gold is also easier to store, given that it is much more valuable than silver by weight. Unlike silver, gold is regarded universally as a form of money, giving it greater liquidity in physical form throughout the world. No matter where you are, you will always be able to find gold buyers.
Precious metals buyers may thus opt to purchase both metals, and perhaps other precious metals such as platinum or palladium, to diversify their risks.