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Gold To Silver Ratio: Not Learned In School, But Well Worth Monitoring


Silver to gold ratio approaching 70:1.

Perhaps a correction short term in metals? Looking out several months, where from here?

Is Gold too high or Silver too cheap?

If you have made the decision to incorporate silver or gold into your portfolio, would you be better off buying one metal vs. the other? Or if you want to buy both, how do you split the purchase? Not to complicate your life, but what about buying one and selling the other? A strategy called in the futures market an intercommodity spread. A strategy in which a futures contract (call it silver) of a given delivery month (call it December) is purchased and, simultaneously, a futures contract of the same delivery month of a different (but usually associated) commodity (call it gold) is sold. The objective is to benefit from the changing price relationships of the two commodities.

The Gold to Silver ratio: For experienced metal investors, the gold to silver ratio is one of many indicators used to determine the correct and incorrect time to buy or sell precious metals. Other considerations may include inflation/deflation concerns, seasonality, economical uncertainty, and desire to diversify out of traditional investments, just to name a few.

So what is the Gold to Silver ratio and why does it even matter? By definition essentially, the gold to silver ratio is the amount of silver ounces it takes to purchase one ounce of gold.

At the time this was written (8/5/16), the gold to silver ratio stands at approximately 68 to 1. This includes today's trade, whereby silver fell by 3.4% and gold declined by 1.8%.

That means, at the current price, it would take 68 ounces of silver to buy 1 ounce of gold. Looking at the December 16' respective contracts, the current price of December gold sits at $1344/ounce, while December silver is currently trading at $19.90/ounce.

Simply take the price of gold, divide it by the price of silver and there you have it -- the gold to silver ratio.

Here is an example using recent market prices:

$1344 (December futures gold price) ÷ $19.90 (December futures silver price) = approximately 68 (Gold to Silver Ratio)

So what do I do once I have the ratio? Investors who trade gold futures, silver futures and other precious metals scrutinize the gold to silver ratio as an indication for the right time to buy or sell a particular metal. When the ratio is high (above75), the general consensus is that silver is undervalued. This is because, relative to the ratio, silver is somewhat inexpensive. Conversely, a low ratio (closer to 40) tends to favor gold and may be a signal it's a good time to buy this precious metal. Active investors may monitor this ratio to know when to establish a heavier position in one metal vs. the other or potentially be long/short against one another. Unfortunately, because the gold to silver ratio fluctuates so wildly (every day), it can be difficult for novice or small retail investors to read the signals and implement the correct investment position. Ideally, taking a step back and looking at the big picture will help drown out the day to day noise.

The concept of investing into metals serves as an impetus for diversifying...