Gold/Silver Ratio
What Is the Gold/Silver Ratio?
The gold/silver ratio measures the number of ounces of silver required to purchase one ounce of gold. By measuring the change in the gold/silver ratio after some time, investors hope to estimate the relative valuations of the two precious metals, accordingly illuminating their choices regarding which metal to buy or sell at some random time.
How the Gold/Silver Ratio Works
Since gold and silver prices change in light of the law of supply and demand, the gold/silver ratio has varied after some time. Before the adoption of the fiat currency system, national currencies were many times backed by gold or silver. This implied the gold/silver ratio was definitely more stable in the past than it is today. For sure, it would frequently be fixed at indicated exchange rates relative to units of national currency. These exchange rates would change in light of the perceived economic strength of the nation being referred to.
In 1913, the Federal Reserve was required to hold gold equivalent to 40 percent of the value of the currency it had issued. A huge change happened in 1933, when President Franklin D. Roosevelt suspended the gold standard to stem recoveries of gold from the Fed. This, alongside different measures, debilitated the connection between the dollar's value and gold. Numerous onlookers view this event as the moment when the U.S. dollar turned into a true fiat currency, after which the job of legislatures in setting the price of gold and silver consistently declined.
Real World Example of the Gold/Silver Ratio
To outline the gold/silver ratio, consider a scenario wherein gold is trading at $1,500 per ounce and silver is trading at $15 per ounce. The gold/silver ratio would be 100, since it would take 100 ounces of silver to purchase 1 ounce of gold.
As of December 2020, the gold/silver ratio was around 75, down from 114 in April 2020. The ratio has consistently move since arriving at a nadir of 31 in April 2011.
Strangely, in light of the fact that precious metals have been valued commodities for millennia, it is feasible to compute surmised gold/silver ratios inside a few old economies. For instance, during the Roman Empire, the gold/silver ratio was frequently fixed at 12:1.
Features
- The ratio is utilized by investors as a measure of the relative valuation of the two metals, which can assist with illuminating buy and sell choices.
- The gold/silver ratio measures the price of gold relative to silver.
- During the Roman Empire, 12 ounces of silver bought 1 ounce of gold.
