To understand this, consider: how many ounces of silver equal one ounce of gold? Once you know this, you've identified the gold-to-silver ratio.
This ratio, also known as the "mint ratio," signifies the quantity of silver ounces required to match the value of one ounce of gold. It's a measure of price. For example, if 70 ounces of silver match the price of 1 ounce of gold, the ratio stands at 70-to-1 or 7:1.
Why does the gold-to-silver ratio matter?
It helps gauge whether one metal's price is high or low relative to the other. So, if you're questioning whether gold's price is too high or low compared to silver, the ratio aids in that assessment.
But high or low relative to what?
This is where interpretation becomes more of an art than a science.
Some might refer to a starting ratio, like the 15:1 ratio set by the US government in 1792, which hasn't been seen for well over a century. Others might use a historical average, which changes slowly over time.
Seeking a historical perspective?
Sure thing.
Around 210 BCE in Ancient Rome, 8 ounces of silver equaled 1 ounce of gold, setting their ratio at 8:1. Jumping to 46 BCE, Julius Caesar altered this to 11.5:1 due to varying gold inflows from conquests. Different civilizations across the Middle East and Asia also used gold and silver, sometimes valuing silver more than gold, likely resulting in lower ratios.
Wasn't the ratio fixed at some point?
On and off, yes, but a substantial international effort to fix it took place much later. The Coinage Act of 1792 set it at 15:1 in the US, with similar ratios in Continental Europe and Britain. But events like the California Gold Rush, Industrial Revolution, and the World Wars caused fluctuations.
In the 20th century, the ratio averaged around 40:1, peaking at 100:1 during WWII. So, fixed or not, the ratio's norm seems to be "in flux." However, relative fluctuations, like the 2020 spike at the start of the global pandemic, can occur.
Did the ratio hit an extreme high?
Indeed. In 2020, it peaked at an all-time high of 123:1, likely marking a staggering 5,000-year high. The pandemic widened this spread between the metals, as investors leaned toward gold while shedding silver.
What happened next?
Gold rose, but silver skyrocketed, outperforming nearly all assets in 2020. Silver's monetary value, often discounted due to its industrial aspect, became apparent. Investors recognizing this imbalance likely profited.
Interpreting the ratio is key.
When it rises, gold outperforms silver, and vice versa. Understanding this ratio's history helps anticipate these shifts in performance.
If you're still getting accustomed to this indicator, here's a comprehensive chart illustrating the ratio's 200-year history to provide a fuller view
