The Gold / Silver Ratio nears 85

The Gold / Silver Ratio nears 85 by Ronan Manly – Bullion Star

TDC Note – It seems there is a lot of noise being made about the GSR. When gold and silver part of everyday use – e.g. everyday currency – this would have been of great importance and counted for something. In this day of algorithms, HFT and rigged markets does it matter or better still, what role does the GSR play in todays world? From my perspective the GSR doesn’t have a role in our current monetary environment. I am all ears if someone can explain what role / function this metric actually plays.

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The Gold / Silver Ratio, a measure of the number of units of silver it takes to buy one unit of gold, has just broken out to a new multiyear high and is currently ‘trading’ at approximately 84.60, a level which indicates that gold is looking expensive relative to silver.

As a relative valuation ratio, the Gold / Silver ratio is useful as a way of tracking the relative sentiment towards the two metals as well as whether one metal is overpriced or under-priced relative to the other.

The ratio, which has been in a steady uptrend since May 2011 when it hit a multiyear low of just over 32 on the back of a $45 per ounce silver price, has increased to its current level close to 85 due to the silver price falling at a greater rate than the gold price has fallen, with silver now at just over $14 per ounce.

On a longer time horizon, the gold / silver ratio has not been this high since 1995, so is now hovering near a 23 year high. At current levels, based on the measurement, gold looks expensive relative to silver (or conversely silver looks inexpensive relative to gold), and a reversion to a lower ratio would mean a relatively stronger performance of silver relative to gold.

But will a reversion to a lower ratio happen anytime soon? The answer is that its difficult to say, since it depends on many variables that influence the sentiment towards one or both of the two precious metals such as the US dollar, interest rates, industrial demand for silver, and importantly how the price discovery of both metals pans out in the synthetic paper London and COMEX markets for gold and silver.

Since 1970, the gold / silver ratio has only ever traded above 85 during the years 1990 to 1995, so history would suggest that while such an extreme ratio can persist, it doesn’t persist forever.

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