Gold Silver Ratio

Gold silver ratio is an important factor in precious metal investment but is often neglected by investors. Many investors focus intensively on precious metal prices fluctuation rather than the relativity factors. Professional precious metal investors could make money by mastering gold silver ratio alone.

Gold silver ratio is a value (number) by dividing gold price with silver price. Take example of today’s gold price ($1223.80) and silver price ($18.90).

Gold silver ratio = 1223.80 / 18.90 = 64.75

(For simplicity sake, we round it and use 65)

gold-silver-ratio-1-65Professional precious metal investors who focus on gold silver ratio never worry about price of gold and silver dropping or rising. For them, regardless of which direction price moving, they make money out of the market.

Precious metal investment is a long term investment, let’s look at the history of gold silver ratio as far as we could:

gold-silver-ratio-1968

Regardless in which investment market, it is impossible to catch the bottom to buy and sell at the top. Forget about gold silver ratio bottom at BELOW 20 and top at ABOVE 100. Let look at some more reasonable numbers: bottom at 40 and top and 80.

The method they use is simply swapping gold and silver at the correct ratio. When gold silver ratio is high, they convert their gold into silver and wait. When gold silver ratio is low, they convert back their silver into gold. So where is the money being made??

Theoretically, if you have 1 oz gold at the gold silver ratio of 80 (year 1994). You can exchange your 1 oz gold into 80 oz silver. By the the time gold silver ratio drop to 40 (year 1998), you can use your 80 oz silver to exchange for 2 oz gold (2 x 40 oz silver). Because you know how to make use of gold silver ratio, in this swapping process you made 1 oz of additional gold.

When you sell the additional 1 oz gold, that is your profit while you still hold another 1 oz gold as your initial capital. During this process, you pay little attention to and have little worry on the fluctuation of gold price and silver price. You only take the prices to divide them to get your target ratio.

In reality, you cannot simply take gold spot price and silver spot price to swap your gold and silver. Gold and silver prices are determined by spot price PLUS premium. Premium includes minting cost, packing cost, delivery cost, dealer’s profit margin, and depending on the type of gold or silver you are getting, the premium could vary in Malaysia market.

Enough of theory, let’s compare 2 items in the market. 1 oz Canadian Maple Leaf gold coin (from UOB) selling at RM4165 and 1 oz Canadian Maple Leaf silver coin (from BuySilverMalaysia.com) selling at RM85.

uob gold price bsm

The current gold silver ratio in the market is:

Gold silver ratio: RM4165 / RM85 = 49

The swapping process for gold and silver in the market always uses the selling price of the precious metals rather than the theoretical spot price. Hence, you use 1 oz gold to exchange 49 oz silver, OR use 49 oz silver to exchange for 1 oz gold.

Gold silver mining ratio has been around 1 to 9. Since 80% of the silver being mined is a by product for gold, silver is only produced when there is gold. In other words, when 1 oz gold is mined from the ground, there is ONLY another 9 oz silver being brought up together.

Whether you want to use gold silver ratio of 65 or 49, the ratio is still way too high from the actual mining ratio. In order for gold silver ratio to come down, there would be 2 possibilities:

  1. Gold price stagnant while silver price goes up significantly higher, OR
  2. Gold price appreciates at a slower pace than silver

Either way, it is going to make silver looks extremely cheap at current price.

Silver Malaysia eBookIn the eBook: Practical Guide For Investing Silver In Malaysia I discuss more strategies for investing silver in Malaysia. You’ll learn many other “practical issues” in silver investment and I will show you how to solve them – right from choosing your 1st oz silver to storing your 1,000 oz silver. 

2 thoughts on “Gold Silver Ratio

  1. Hopefully silver will be very rare in the future due to industrial usage and that is when silver price will be skyrocketing. Probably even higher then gold price.

  2. Pingback: Capital Gain or Dividend Yield | Silver In MalaysiaSilver In Malaysia

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