The gold/silver ratio is simply the price of an ounce of gold divided by the price of an ounce of silver. So if gold trades at $1000 and silver at $10, then the ratio is 100.
Over the past decade, the ratio has averaged about 50. So when the ratio is way above (or below) that, silver could be seen as being undervalued (or overvalued) in relation to gold.
Take a look at the chart below, which focuses on the past three years. As you can see from the red line, currently, approximately 63 ounces of silver will fetch you an ounce of the yellow metal.
A reversion to the mean?
Despite falling from its highs of 84.4 (circled) in late-October last year, the current ratio level is still substantially higher than the 10-year average. What’s going on here?
Well this reversion towards the mean is not the result of a falling gold price. We know that because gold has been rising steadily - up 13% over the past month from $864 to $974.
It’s because the silver price has been rising faster than the gold price. In fact, over the same period of a month, silver has moved from $12 to $15.5 - a rise of 29%. Silver has risen more than twice as fast as gold.
Where does it go from here? Well, we don’t believe that gold is set for a major correction any time soon. With a return of inflation a very real possibility, gold will continue to attract attention as a store of value - an inflation hedge.
So if the gold/silver ratio continues to head back towards its 10-year average at 50, that means one thing: silver is going up.
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