Some people think that they can’t afford to invest in gold because it is expensive. However, Silver is much cheaper and is also a valuable way to protect your wealth and may even be a better investment than Gold. One way to gauge if Silver is a good investment relative to Gold is the “Gold to Silver Ratio.”
The Gold to Silver ratio represents the price of silver relative to the price of gold at any given time. The ratio is simply the price of gold divided by the price of silver represented in the form of a ratio. If the price of gold is $1,000/oz. and the price of silver is $20/oz. then the gold to silver ratio would be 50:1, or simply “50″ (1,000 divided by 20 is 50).
Natural Supply
One factor determining the gold to silver ratio is the physical ratio of these naturally occurring elements in the earth’s crust. According to the U.S. Geological Survey, on average silver occurs at 0.07 parts per million, and gold at 0.004 parts per million in the Earth’s crust. Thus, the naturally occurring gold to silver ratio is 17.5:1.
Historical Ratio
Historically, the price of silver drops faster than gold in a precious metals bear market and rises faster than gold in a precious metals bull market. The ratio is therefore applicable in determining market direction.
In the last great precious metals bull market, 1960 – 1980, silver outperformed gold about 2.3 times (230%). Gold rose from $35 to $850 or a gain of 2,429%. Silver rose from 90 cents to $50, or a gain of 5,555%, and 229% better than gold.
Current Ratio
The 200 year average for the ratio is about 30:1. As of May, 2010, the gold to silver ratio sits at about 67 where gold is $1,190/oz and silver is $17.80/oz. If the ratio just reverts to its historic average of 30, silver will outperform gold very nicely.
Trading Strategies
One way to trade the gold to silver ratio is to buy silver through the Silver ETF (SLV) when the ratio is high, say over 75, and to buy gold through the Gold ETF (GLD) when the ratio is low, say under 25.
For more information on the Gold to Silver ratio:
