This Ratio Tells Us When to Buy Silver

|September 20, 2023
Close-up of a gold-ingot on top of a troy ounce silver and palladium bar

Over the weekend, my wife and I were flipping through TV channels when we came across an amusing sight on one of the home shopping networks.

They were selling 20-gram gold bars… hanging on necklaces.

“That’s hideous,” my wife remarked. “Who would even wear that?”

She wasn’t wrong. It was an ugly necklace. But then I directed her attention to the price tag.

“$1,300?! For that tiny thing? It’s just a gold square!”

I’m hoping that means there’s no pricey jewelry on her holiday wish list. But it did get us talking about why folks buy gold and silver at all.

Many people think gold and silver are just for making jewelry. But Manward readers know that these metals, which were used as money for thousands of years, are still symbols and stores of wealth.

Yet in a rip-roaring bull market like we had for more than a decade… many investors fail to appreciate the allure of investing in gold and silver.

But they should… for several reasons.

Global Metal Supply

The first reason is scarcity. Compared with those of most other metals, world supplies of gold and silver are incredibly tiny.

That’s why even just a handful of gold could be worth more than the average American has in savings. There’s only so much of it to go around.

Another reason is that price changes in gold and silver aren’t closely tied to the stock market’s volatility, making these metals potential safeguards against economic downturns.

Just look back at the 2000s…

Between the burst of the dot-com bubble in the early 2000s and the worst recession in a century just a few years later, it was a brutal decade to be in the stock market.

From 2000 to 2009, the S&P 500 dropped 9%, the Dow fell 24% and the Nasdaq plunged 44%. Over the same period, the value of both gold and silver more than tripled.

Gold - Silver

Precious metals aren’t just eye candy. They can provide some fairly impressive returns during uncertain times.

And my conversation with my wife got me thinking… Is now a good time to buy gold or silver?

To answer this, I looked at the gold-silver ratio. It’s the per-ounce price of gold divided by the per-ounce price of silver.

This ratio has been a reliable indicator for trading precious metals, especially silver. A surge in the price of gold tends to drive up the price of silver.

Of course, their prices don’t always move in lockstep. There’s often a lag before silver catches up. But the gold-silver ratio can help us identify when silver is either undervalued or overvalued relative to gold.

Gold-silver ratio

Historical data from the last 50 years shows the gold-silver ratio has been around 62 on average, with a standard deviation of about 17.

So when the ratio is 79 or higher, it means silver is relatively cheap compared with gold. And when the ratio is 45 or lower, it’s relatively expensive.

I found that, over the same period, whenever the gold-silver ratio was above 79, silver gained an average of over 18% in the 12 months that followed.

And a higher ratio usually correlated with even more significant gains.

For example, when the ratio exceeded 97 (two standard deviations above average), it resulted in an average surge of 58% in the subsequent year.

With the ratio now at 83, silver looks undervalued compared with gold. And that means it looks like a solid buy right now.

I’m sure my wife would be delighted.


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