The Gold-Silver Ratio Explained

Seemingly forgotten in the shadow of cryptocurrency and gold, silver quietly gained over 7% last year.

Even so, silver was considered a major underperformer compared to gold, which was up more than 12% in 2017.

But even with silver lagging a bit behind gold, there are strong indicators that 2018 could prove to be a big, big year for the white metal.

In fact, mainstream investors have started betting big on silver in anticipation of a big price upswing later this year.

The gold-silver ratio remains historically high, indicating that silver is severely undervalued compared to its yellow counterpart.

But before we jump into what the new year holds for two of the world’s favorite precious metals, let’s break this essential ratio down...

What You Need to Know

For the precious metals and hard-asset enthusiast, the gold-silver ratio is part of common parlance. But for the average investor, this arcane metric is anything but well-known.

And this is unfortunate because there’s great profit potential from using a number of well-established strategies that rely on this ratio.

Boiled down, the gold-silver ratio is essentially how many ounces of silver it takes to buy 1 oz. of gold.

It sounds simple, but this ratio is more useful than you'd think...

These days, gold and silver trade more or less in sync. But there are periods when the ratio drops or rises to levels that could be considered statistically extreme.

It's these extreme levels that create trading opportunities.

The trade is predicated by accumulating greater quantities of the metal and not by increasing dollar-value profits. The essence of trading the gold-silver ratio is to switch holdings when the ratio swings to historically determined extremes.

For example, when a trader possesses 1 oz. of gold and the ratio rises to an unprecedented 100, the trader would then sell their single gold ounce for 100 oz. of silver.

When the ratio then contracts to an opposite historic extreme of, say, 50, the trader would then sell their 100 oz. of silver for 2 oz. of gold.

In this manner, the trader would continue accumulating greater and greater quantities of metal, seeking extreme ratio numbers to trade and maximize holdings with.

It's also important to note that no dollar value is considered when making the trade — the relative value of the metal is deemed unimportant.

For those worried about devaluation, deflation, currency replacement, and even war, this strategy makes sense.

Precious metals have a proven record of maintaining their value in the face of any contingency threatening the worth of a nation’s fiat currency.

The most important thing to remember is your own trading personality and risk profile because there's always some degree of risk involved in this form of trading...

2018: Silver’s Year

Like I touched on earlier, the gold-silver ratio remains at an all-time high.

Currently, the ratio stands over 77-to-1.

This means you may buy 77 oz. of silver with just 1 oz. of gold. Or the other way around being that it would take 77 oz. of silver to buy 1 oz. of gold at current market prices.

When comparing that with the historic average of the ratio (16-to-1) and with the modern average over the last century (40-to-1), there’s no doubt that silver is indeed on sale.

And the mainstream investment world has its eyes on silver as we enter into the new year. A recent Goldman Sachs report was extremely bullish on silver and forecast the white metal to outperform gold this year.

Bank of America also forecast a good year for silver, too, predicting gains of around 8%. A Bank of Nova Scotia report contained similar sentiments, saying the momentum indicators are bullish for the white metal.

The move toward clean energy will be a big boon to silver, also. China, in particular, continues to rapidly increase its solar energy production.

Beijing aims to triple its solar capacity by 2020. And because last year ranked as the strongest on record for solar-related demand, this year will surely continue that trend.

This boost in demand comes during a period of tightening supply, too. Two-thirds of the world's top silver miners suffered significant production decreases throughout last year.

So, when considering these basic supply and demand dynamics alone, it’s definitely looking like 2018 will be silver’s year...

The Bottom Line

Silver tends to get lost in gold’s shadow. But it seems like this year, more investors are interested in taking a peek at what the white metal has to offer.

With the gold-silver ratio at such a high level and with basic supply and demand dynamics pointing toward increasing prices in the future, this is a good time to take advantage of silver at what could be the lowest prices we’ll see them at all year.

That’s all for now.

Until next time,

John Peterson
Pro Trader Today