The gold-silver ratio is one of the most closely watched indicators by precious-metals investors. It measures the relative value of the two metals and serves as a compass for arbitraging between them. Here’s a simple explanation.
Definition: what is the gold-silver ratio
The gold-silver ratio indicates how many ounces of silver are needed to buy one ounce of gold. It is obtained through a very simple calculation:
Ratio = price of an ounce of gold ÷ price of an ounce of silver
For example, if an ounce of gold is worth 80 times the price of an ounce of silver, the ratio is 80. The higher the ratio, the “cheaper” silver is relative to gold; the lower it is, the more expensive silver is compared to gold.
How to interpret it
Investors use the ratio as an arbitrage signal:
- High ratio (silver relatively cheap): some see it as an opportunity to buy silver, betting on a future narrowing of the ratio.
- Low ratio (silver relatively expensive): others then arbitrage in favor of gold.
Historically, the ratio has varied greatly across eras: very low when silver had a central monetary role, much higher in the modern era where gold dominates as a store of value. There is no absolute “right” level: the ratio is assessed relative to its recent history.
A tool, not a crystal ball
The ratio is useful but predicts nothing on its own. Several factors make it move:
- the industrial demand for silver (electronics, solar), which barely exists for gold;
- economic cycles: silver, being more industrial, is more sensitive to the economic climate;
- investment flows and the monetary context.
That’s why the ratio is read together with other elements (price trends, macro context), and not in isolation.
How to use it in practice
- Track the ratio over time rather than a single point-in-time level.
- Compare it to its recent average to judge whether silver is expensive or cheap relative to gold.
- Arbitrage according to your strategy: some “rotate” between gold and silver as the ratio hits extremes, others keep a fixed allocation.
For the fundamental debate between the two metals, see silver or gold: which to choose.
The role of VAT in arbitrage
Beware: in France, silver bears 20% VAT on purchase, while gold is exempt. This cost gap must be factored into any arbitrage reasoning: a ratio “favorable” to silver must offset this tax handicap before it becomes truly worthwhile.
In summary
- The gold-silver ratio = price of an ounce of gold ÷ price of an ounce of silver.
- High ratio = silver relatively cheap; low ratio = silver relatively expensive.
- It’s an arbitrage signal, to be read relative to its history, not a forecast.
- Factor the 20% VAT on silver into any arbitrage.
To track silver, check the current price and find your city.
This article is informational and does not constitute investment advice.