How to Use the Gold-Silver Ratio to Accumulate Precious Metals

Most hard asset advocates believe that the gold/silver ratio is common knowledge. However this ratio, which compares how many ounces of silver are needed to buy one ounce of gold, is not very well known outside the hard asset circle and is certainly unfamiliar to most average investors. And that’s unfortunate.

That’s because the gold-silver ratio can be used as a part of a simple strategy to help you to determine when to trade precious metals in order to (hopefully) increase the quantity of gold or silver that you own.

Because the gold-silver ratio compares the number of ounces of silver you need at any point in time to purchase one ounce of gold you can use this comparison as one of the indicators that helps give you insight as to when you should switch your holdings from gold to silver and vice versa.

It’s also very easy to determine the ratio.

How to Determine the Gold/Silver Ratio

To figure out the gold/silver ratio all you have to do is divide the price of gold by the price of silver.

If gold is trading at $1,000 per ounce when silver is trading at $10 an ounce the gold-silver ratio is 100 because when you divide 1,000 by 10 you get 100. On the other hand, if silver is trading at $25 per ounce and gold is $1,000 an ounce the ratio would now be 40 (1,000/25).

Between 1975 and the early part of 2010, the Gold/Silver ratio had hit a high of 100.82 in 1990, and a low of 14.01 in 1980. The majority of the past thirty-five years the ratio has been in a trading range between 50 and 80.

As of today (March 15, 2010), the spot price of gold is $1108.60 per ounce and the spot price of silver is $17.12 per ounce. Therefore the gold / silver ratio is 64.75. In other words, you would need to sell about 65 ounces of silver in order to buy one ounce of gold.

How Can People Use this Ratio as Part of Their Precious Metals Accumulation Strategy?

Let’s start with the presumption that you are an experienced trader who already owns gold. If the gold-silver ratio rises to some number that you predetermine (it might be eighty, ninety, one hundred, etc. – the choice is yours) you would sell one ounce of gold and buy the equivalent number of ounces of silver.

In other words, if you decide to switch from gold to silver when the ratio hits eighty, for every ounce of gold you sell you would buy 80 ounces of silver.

Let’s say you’ve done this and over time the ratio contracts. When it reaches your predetermined low you would then sell your silver and buy gold. In this example, let’s say your “trigger point” is a gold/silver ratio of forty. Now for every eighty ounces of silver from your last trade you would buy two ounces of gold.

Since this is an overview, before you initiate any trades you should learn as much as you can about this ratio as well as other aspects of investing and/or trading in precious metals. This knowledge cannot be gained overnight. Any trades you make are your responsibility alone, so do your due diligence.

To begin, take a look at an overview of the gold/silver ratio on an annual basis from 1883 through 2009.