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Forbes: Trading The Gold-to-Silver Ratio In Times Of Crisis

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EDITOR NOTE:  The “gold-silver” ratio (in reality, the silver-to-gold ratio) is currently at historic levels. This means that silver is both a safe haven for wealth AND an excellent investment for growth. The anticipated post-pandemic economic rebound should push silver prices higher due to its industrial applications. Our own, Senior Partner of GSI Exchange, Anthony Allen Anderson explains to Forbes in this article.  

On March 18, the gold-silver ratio reached an extreme high of 126.43. If you’re a seasoned metals investor, you know the significance of this level: It’s never been reached before. One expert is even calling it a 5,000-year high.

What’s The Big Deal?

First, let’s back up and think about what this means. For starters, the gold-silver ratio (which should actually be called the silver-gold ratio, by the way) refers to how much silver is needed to purchase one ounce of gold. In the case of the March high, you needed 126.43 ounces of silver to buy one ounce of gold. As of this writing, the ratio stands at roughly 110-to-1, still a record high.

When the gold-silver ratio rises, it means gold is outperforming silver. When it falls, silver is outperforming gold. Working in the precious metals investment space, I’ve heard gold investors say they believe the ratio should fall back to its average. And what average is that? Well, that’s debatable. Some say it should go back to where it was when the Mint Act of 1792 set the ratio at 15-to-1; some say it should fall back to its 20th-century average of 47-to-1; yet others say the “new” average might be between 50-to-1 and 70-to-1. Whatever the case may be, 126-to-1 is still pretty high.

At this point, you can probably see the logic: A high ratio means silver is underperforming gold and therefore a potentially good investment, as it anticipates the ratio to fall back from relatively inflated levels. But is now a good time to jump in, considering that the recessionary winds are once again blowing on the horizon? You may be wondering, “If I buy silver now, might I see it go up in the near future?” Well, that’s a good question. When will silver finally catch up to gold in terms of performance? To gain some insight on this question of timing, let’s consider how the gold-silver ratio performed during past recessions.

The Gold-Silver Ratio Across Recessions Since 1970

In most periods of economic downturn, the gold-silver ratio tends to rise. This makes sense because gold tends to experience greater inflows as a result of investors seeking safety. But what does this say about silver?

The gold-silver ratio tends to fall after a recessionary period. Again, when the ratio falls, silver outperforms gold. If silver, like gold, is also a safe haven asset and a form of “sound money,” what accounts for the lag?

One reason is investors may actually prefer gold to silver, driving up prices of the yellow metal against silver’s second-place status. Gold is the rarer of the two metals. Remember, when gold backed currency, it was called the “gold standard,” not the “silver standard.”

Aside from this, there’s another important reason that may give some strategic insight as to the timing of gold’s second: Silver is also an industrial metal in addition to being a precious metal. The wheels of industry tend to ramp up as economies recover from recessionary slumps. And when industry ramps up, so does the demand for silver’s industrial consumption.

So, to answer the question you may be asking yourself with regard to timing your silver buys, both a recessionary period and a high gold-silver ratio could be good moments to invest. In doing so, you are anticipating a potential rise in silver prices when the economy recovers from a recession, and a high gold-silver ratio could be a good indicator signaling a favorable time to buy.

How To Play The Current Gold-Silver Ratio

Just because the ratio is at a high doesn’t mean that gold isn’t going to rise even further, potentially taking the ratio to even greater heights. Nobody can accurately predict where the ratio is going, especially in light of the COVID-19 economy, its effect on currency and the increasing need investors may have for a safe haven. In other words, there are always speculative risks when investing in silver. No investment is a surefire winner, and attempts to time the market will often be met with disappointment. Remember, forecasts are often based on current conditions. These conditions change, which can be favorable or unfavorable to any market, including silver.

But the nature of the ratio level — unprecedented at its current height — is evident. Precious metals investors may interpret the current level as a favorable entry range, accumulating silver allocations small chunks at a time. Silver prices may rise as traders attempt to exploit this wide gap between gold and silver. But it’s more likely that silver will rise as the global economy once again kick starts its industrial engines: industrial silver rising along with safe-haven demand.

Originally posted on Forbes

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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