Gold Investing Info

One way to determine if gold is over/undervalued (or if silver is over/undervalued) is to look at the gold/silver ratio. This is just basically the price of gold divided by an ounce of silver.

The reason it is useful to look at the ratio is that the sources of demand for the two metals are very similar. Both have some industrial uses, and both are used for jewelry. The two metals can also be used as a hedge against inflation and currency devalution. In short, all the reasons we listed in the Why Invest In Gold article also apply to silver.

However, the ratio of the two metals has varied wildly. For ages, the two metals were fixed at 16:1, meaning one ounce of gold was worth 16 ounces of silver. Currently, the ratio is much different. As of the time of this article’s posting, gold is trading at $918 per troy ounce whereas silver is $12.94, a ratio of about 71:1. This is well more than four times the ratio of the historical ‘norm.’

There is much debate over what the ratio “should” be. The forces of supply and demand will result in the ratio at any given time, but looking at the ratio’s past performance may give us a view of potential changes in the gold/silver markets. During the gold/silver boom brought on by the stagflation of the Carter regime, the ratio dropped to the low 30’s by the early 1980’s. However, during gold’s lows in the early 90’s, the ratio got up to near 100:1.

It’s difficult for anyone to guess where the gold/silver ratio will go, even if there is a gold rush. For instance, during Weimar Germany, the gold/silver ratio exploded since Germans piled their money into gold, since it was worth more than silver. Many Germans were physically fleeing the country and needed gold instead of silver since gold was worth more and they could more easily physically transport their net woorth in gold bars than dragging a ton of silver with them. Such a situation is highly unlikely today, but it’s useful considering how various factors may affect gold and silver’s price.

If currencies begin collapsing, then demand for gold and silver will increase. If countries decide to backup their currencies by just gold or gold and silver will highly affect the value of each metal. In general, the two metals’ prices travel together, but it is always worth looking at the ratio of the two to decide which one may be a better investment.