There is something called the gold/silver ratio. For those who don’t know, that ratio is the price of one ounce of gold compared to one ounce of silver. That is, how many ounces of silver would be a trade for one once of gold at any given point in time.
A higher ratio means that either gold is overpriced, or that silver is underpriced. That can dictate which of the metals is the better deal. Historically, the ratio is usually between 60 and 80. In April of this year, the ratio was 100.8, meaning that one ounce of gold was worth about 100 ounces of silver.
Some investors are talking about the 80/50 rule. That is, if the ratio is higher than 80, stop buying gold and buy silver instead. If the ratio is less than 50, then silver is higher priced relative to gold, and it’s time to buy gold.
Thanks to the skyrocketing price of silver earlier in the week, the ratio is currently (as of this writing) 57. The gold/silver ratio was last below 50 in April 2011, when it reached a low of approximately 35:1. In April 1968, the ratio hit a century-long low of 16.75:1.
So why is this important to us? If you want to increase your holdings, you would sell some silver and use the cash to buy gold. Once the ratio returns to its historical mean, you would then reap a profit. Let’s say that the ratio hits 40. At that point, 40 ounces of silver (worth $1160 a year ago) could be sold and traded for a single ounce of gold. Once the ratio returns to its historical range, that would require that silver loses value or gold increases in value. Either way, your ounce of gold would be worth 60 to 80 ounces of silver, but you only paid for it with 40 ounces.
Just food for thought.
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