Gold to Silver Price Ratio – A Look at the Past 20 Years

Price correlation of gold to silver

The gold to silver price ratio has historically been an important factor that influences buying decisions taken by investors when investing in precious metals. There are a few factors that drive investors to buy gold or silver. Most investors do not consider investing in gold or silver in isolation. It is usually a decision taken as a part of a concerted strategy to invest in asset classes that minimise risk and maximise gains for the investor. In doing so, an investor who is creating a portfolio of investments to build wealth over the long term will have an investment window of at least six to ten years to remain invested in certain asset classes.

Understanding precious metal investments

Like a palette of paints available to the painter, the investor uses several asset classes to construct a diversified portfolio. These asset classes could consist of equity funds, debt funds, direct equity, bonds, real estate, cash deposits and precious metals, to name a few. There are many views on how much investment should be allocated to precious metals during an asset allocation exercise. Many investment advisors recommend an allocation of 10 to 15% within a portfolio. However, there are a few compelling reasons for investors to invest in gold and silver.

Gold to Silver price ratio
The spot price of gold has risen steadily over the years

Gold and silver investments during market crises

Investors often use precious metals as a hedge against market forces. Gold is a popular choice to hedge against both inflation, as well as interest rates. On the other hand, we often see investors flocking to buy gold or silver when capital markets take a plunge globally. In recent times, the 2008 financial crisis and 2011. This was evident during the 2011 financial crisis when global capital markets crashed due to S&Ps downgrade of the US economy. The market crash prompted investors to move their money away from stock markets, and invest in gold. On August 22, 2011, the spot price of gold touched a record $1,900.

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Gold silver price ratio movements

Situations like these simply mean that prices of gold have surged out of control due to astronomically high market demand. During a time like this, if silver prices did not respond adequately to the shift in the market, the gold-silver price ratio would rise and the spread would widen. But this is not the case. Trends show us that the spread falls. For example, the current ratio of gold to silver is around 75: 1. This means that gold is 75 times dearer than silver. It would take 75 ounces of silver to purchase 1 ounce of gold. Now, if the price of gold continued to rise unabated, without a proportional rise in silver prices, the gold-silver price ratio would surge upward, as gold would then become several times dearer than it is now when compared to silver.

Gold to Silver price ratio
When silver prices outperform gold in a bull market, the price ratio falls

An inverse relationship

However, it is important to note that when precious metals enter a bull market phase, silver usually outperforms gold. Since silver is more affordable, demand for it remains higher, driving the prices of silver higher. In recent years, silver price movements are not dependent only on investor demand. Industrial demand and scanty supplies have been pushing silver prices up. When this happens, the gold-silver spread or the difference between the prices of the two metals reduces, and the ratio falls.  A look at the 20-year gold-silver ratio tells us that in 2011 when gold prices were at their highest, the gold-silver ratio fell to a record low of 30.48. On August 22, 2011, silver rose to more than $42 per ounce from a low of around $28 on 1st February 2011. This was the same date when gold touched its record high.

In 2016, gold prices were above $1400 an ounce, and the gold-silver price ratio was around 65. A close look at 2011 shows us that the price curve of silver outperformed against gold during that period. Therefore, we can say that the gold-silver price ratio has an inverse relationship with market rises. As a gold or silver investor, it is important to understand this relationship and explore the drivers responsible for the rise and fall in gold and silver prices.

Call our precious metals experts to find out more about market trends

At Physical Gold, our investment advisors do not give you tips on how to time the market. We believe that investments in precious metals are best done by understanding the fundamentals of the market and making an educated decision on when and how to invest. Call us now on 020 7060 9992 or get in touch with our team online to find out more about price movements in the gold and silver markets.

Image credits: Public Domain Files and Wikimedia Commons

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