Most traders and investors that involve themselves in the precious metals markets, especially the gold and silver markets are likely to know of the gold-silver ratio or otherwise known as the mint ratio.
The gold-silver ratio represents the relative value of one ounce of silver to an equal weight of gold. As an example, if the price of gold is $1000 and the price of silver is $20, the ratio is 50.
In the past, the ratio was used by the governments as a means to achieve monetary stability. Things changed in the 20th century when even the gold standard was dismissed. Since then, the 2 precious metals trade independently in the markets freely, causing the gold-silver ratio to float and swing wildly.
- Let’s have a quick look at the historical figures of this ratio,
- During the Roman empire, the ratio was approximately 12.
- In 1834, congress set the ratio at 16 and it continued for 28 years.
- Later in 1934, President Roosevelt set the price of gold at $35 which caused the ratio to peak at 98, 5 years later, as shown by the first circle in Chart 1 below.
- 1991 came and the ratio hit 100 as silver hit record lows, which can be seen at the second circle.
- More recently, in 2020 the ratio hit another high of 114 (third circle in the chart) when the price of gold soared due to the coronavirus pandemic. Investors flocked to the safe haven and away from risk assets.
Chart 1: The gold-silver ratio chart.
How to trade the gold-silver ratio
The main concept of this way of trading is to accumulate greater quantities of metal instead of focusing on the fluctuations of monetary profits.
Here is a simulated scenario:
When a trader possesses 100 ounces of silver and the ratio drops to low of 50, he will switch his holdings to 2 ounces of gold.
Now, the trader has 2 ounces of gold, and when the ratio increases to a high figure such as 100, he will then switch his 2 ounces of gold to 200 ounces of silver.
The trader has just doubled his silver holdings by trading based on the mint ratio.
Chart 2: The monthly chart of gold-silver ratio
From the chart above, it is observed that the mint ratio has been increasing over the decade which means the price of gold has been increasing relatively more compared to silver.
The ratio peaked in March 2020 for obvious reasons, the coronavirus pandemic where capital was being poured into the safe haven. However, the ratio declined significantly starting in May 2020 although the price of gold was still rallying past all time highs. What this implies is that the price of silver was rising on a larger scale compared to gold.
Gold rose by 42.21% in value from its swing low on March 20 to its swing high on August 6.
On the other hand, silver price increased by 153% from its swing low on March 20 to its swing high on August 7.
Another fact we can notice from the above statement is that prices of gold and silver are highly correlated. In fact, their positive correlation is at a whopping 93.7% at the time of writing.
Chart 3: Gold daily chart
Gold price rose by 42.21% in the period ( March 20th 2020 – August 6th 2020)
Chart 4: Silver Daily Chart
SIlver price increased by 153% in the period (March 20th 2020 – August 7th 2020)
To conclude, silver has done significantly better than gold in terms of ROI during the pandemic. There is still a lot of upside potential for silver, as it is currently trading at $26.2 per contract compared to its all time high of $49.45 per contract.
It will be interesting to see how gold will fare as the default safe haven asset, as the US Dollar is currently in a stronger position primarily due to inflationary concerns and the possibility of an earlier rate hike.
Chart 1: https://www.macrotrends.net/1441/gold-to-silver-ratio