Gold-silver ratio

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Gold-silver ratio
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Gold-silver ratio is the relation between the price of gold and silver, therefore it is the result of several factors:

  • The silver ratio is the ratio of the price of gold to silver, thus expressing the resultant existence of several factors: the money supply associated with gold;
  • The silver ratio is the ratio of the price of gold to silver, thus expressing the results of the existence of several factors: the money supply linked to silver;
  • the amount of available gold;
  • the amount of silver available.

The first two are related to demand, i.e. people and entities that buy and do not want to buy. Volume speaks about the strength of demand, i.e. the amount of capital exchanged on bullion. It is not right to take into account all available money, because only a part of it goes to the metal market. Gold-silver ratio expressing how many ounces of silver is worth one ounce of net gold on the market is a secondary indicator. It does not give buy or sell signals, it does not reflect moods directly and it is not related to the trading volume. It is the quotient of the price of a raw material which is subject to certain inflows and the price of another raw material which, to a large extent, is subject to completely different laws [1]. The established gold-silver ratio was based on bimetallism - and ore monetary system based on two precious metals: silver and gold. Both metals participated equally in the money circulation. However, if the market relation between gold and silver differed from the statutory relation between gold and silver coins, then the relatively more expensive money ("better") was thesauruses (saved, put aside), and the relatively cheaper money ("worse") remained in circulation [2].

The value of gold and silver

Gold is mainly the metal of central banks and jewellers. Silver is mainly the metal of many branches of industry. The common ground is of course investment in metals, but silver is far from being gold in this role. The tonnage of silver in the role of investment products exceeds the tonnage of gold by a mere 4-5 times. The investment value of the gold market is at least several dozen times higher than that of silver. Gold-silver ratio is, therefore, a comparison of two different markets [3].

Decrease in gold-silver ratio

A drop in the price of gold to silver can mean one of two things[4]:

  • The price of gold is falling, while the price of silver is falling more slowly or is standing still (which is not possible in practice because it means there are no market participants). In the case of the first option, the purchase of silver will not bring any profits. It will even expose you to losses.
  • The price of silver goes up and the price of gold goes up, while the price of gold goes up slower, goes down or stands still (which in practice is impossible because no price changes mean no market participants). Increase of silver price does not mean profit yet. Due to the VAT tax, which covers silver (it does the margin on the physically purchased gold at the level of about 25% in many European countries), the profitability of the investment only makes an increase by no less than just about 25%.

The reliability of gold-silver ratio

Gold-silver ratio does not give certainty of any growth. Generally speaking, it is about an increase in the price of the metal, not a decrease in the ratio. Even if the ratio drops to 1:50, it does not generate a profit if an ounce of silver is bought at a lower price than on the day of purchase from a dealer. Hence, the price of silver cannot primarily go down [5].

The gold-silver ratio in history

The gold relationship is currently unstable. It changes from one day to the next. In the old days, things were a little bit different, or even completely different. The index of precious metals was largely determined by their quantitative ratio, according to many sources. Although the rulers arbitrarily set the relationship at a certain level, it is said that it had much in common with the real available resources of precious metals. When a given economy/civilization was aware of an influx or escape of one of the metals, it affected their mutual relationship [6]. Observing this led to the formulation of Copernicus-Gresham's law. People kept the metal, which was growing in value towards the other. History knows many of these cases.

Historical analysis proves that the further back the closer the relationship between Au:Ag and 1:1, the closer the relationship between Au:Ag 1:1. Such a relationship was present in Egypt a few thousand years ago (about 5-6 thousand). With time, in the country on the Nile, this relationship began to change. However, it was not a jumping change. Initially, this value took the form of 1:2,5. Slightly later and a bit further east, in such areas as Jerusalem, Mesopotamia and Persia our ratio grew. It had different indicators, 1:7, 1:7,5, finally 1:15. In ancient Greece, the norm was 1:13 and 1:14. This had its roots in beliefs - the Moon was tied to silver, the Sun to gold. And since the annual cycle of the Sun is 13 cycles of the Moon, the ratio of gold to silver is 1:13. In Rome, the relation of gold to silver, which we know from the notes on aureus and denarii, oscillated around 1:12. So for thousands of years (about 5-6 thousand years), the relation of gold to silver has been steadily increasing every few centuries [7].

The history of 13th century France proves that the relationship there was from 1:12 to 1:16. During the centennial war, there was a real imbalance, as evidenced by historians' notes that in 1419 Au: Ag ratio was 1:4,1. It was, however, temporary. With time, the relationship returned to a level between 1:10 and 1:12. In the days of Louis - XIV and XV - silver-gold ratio was at the levels of 1:17, 1:16,3 and 1:14,5. The time of their reign was the seventeenth and eighteenth centuries. In the nineteenth century, it turned out that at some point the existence of bimetallism seemed to work, and the relationship of both metals on the markets fluctuated between 1:15 and 1:16. In the United States, where the money was both metals in 1873, the relationship was 1:16. In 1886 it was already 1:20 [8].

The parity started to increase dramatically in the 20th century - the average value from that period is about 50. The first important impulse for the increase was the costs associated with the First World War, which caused havoc in the US monetary system. The relation between the price of gold and the price of silver at that time ranged from 30-40. The biggest leap, however, was the crash on the stock exchange in 1929. The great crisis led to such a large drop in the price of silver that in 1932 the parity exceeded the level of 80. After the devaluation of the dollar and raising the price of gold to US$35 in 1934, the ratio of the prices of both metals was set at a slightly lower level. The historical record was reached in 1939 and amounted to 98. After the end of World War II, the price of silver started to rise steadily. As a result, in the years 1963-1966, the parity remained at the level of about 27. Then, in the years 1967-1970, its average value was 20 [9].

The gold-silver ratio nowadays

The record high parity of gold and silver means that silver is extremely underestimated. Such a situation cannot last forever, so in the past, there was always an explosion after the hole period. An example is the recession in 2008 when the price of grey ounce fell to US$9.73 per ounce. After its completion, in April 2011, the quotations reached the level of US$49.82 per ounce. This means that in less than 3 years investors in silver could earn over 500%. Many experts suggest that we are currently facing a similar situation and that silver will be a source of income again. Of course, we will see whether they are right or not in time - and probably not for months, but rather for years [10].

The most interesting thing, however, is that under-estimation of silver usually accompanies serious crashes. The fears are all the greater because this is only one of many signals that could indicate the upcoming crisis. The boom on the American stock exchange has been going on for over 9 years, while the public debt there has already exceeded US$20 trillion. This record-breaking combination raises serious concerns to the dollar, which is regularly exchanged for gold by Russia and China. One should also not forget about the property bubble or crypto vault.

Silver can be called the metal of the future. This bullion is used not only in jewellery but also in the medical and technological industry, which is currently the fastest growing industries. No wonder that according to forecasts, the demand for silver in the coming years should be constantly growing - of course, attracting its quotations [11].

Examples of Gold-silver ratio

  • The gold-silver ratio is the most commonly used measure of the relative value of gold and silver, and is calculated by dividing the current gold price by the current silver price. This ratio gives investors a sense of how much each precious metal is worth in comparison to each other.
  • Another example of the gold-silver ratio can be seen in the jewelry industry. Jewelers often use the gold-silver ratio to determine the relative value of gold and silver jewelry pieces. For example, a jeweler may decide to use a gold-silver ratio of 20:1 when crafting a piece of jewelry, meaning that one ounce of gold will be worth 20 ounces of silver.
  • A third example of the gold-silver ratio can be found in the investment world. Investors often use the gold-silver ratio to determine the relative value of gold and silver investments. For example, an investor may decide to invest in gold if the gold-silver ratio indicates that gold is a more valuable investment than silver.
  • Finally, the gold-silver ratio can also be used to determine the relative value of currencies. For example, if the gold-silver ratio indicates that gold is more valuable than silver, then it is likely that the currency being used is stronger than the currency being compared against.

Advantages of Gold-silver ratio

The gold-silver ratio is an important tool for understanding the relative values of gold and silver. It can offer several advantages for investors, such as:

  • Increased diversification: By having a mix of gold and silver, investors can reduce the risk of their portfolio being exposed to price fluctuations in any one asset.
  • Hedging against inflation: Gold and silver are both widely accepted as hedges against inflation, as both metals have historically maintained their purchasing power over time.
  • Easier to compare value: The gold-silver ratio provides an easy way to compare the relative value of gold and silver and make informed investment decisions.
  • Reduced risk: By having a mix of gold and silver, investors can reduce the risk of their portfolio being exposed to large fluctuations in any one asset.

Limitations of Gold-silver ratio

The Gold-silver ratio is a measure of the relative prices of gold and silver and is affected by a range of factors. The following are some of the limitations of the ratio:

  • The ratio does not take into account the relative supply and demand of gold and silver, which can have a significant effect on the price of both metals.
  • The ratio does not account for costs associated with purchasing and storing gold and silver, which may vary considerably depending on the market.
  • The ratio does not factor in the potential for speculation or manipulation of the metals markets, which could cause the ratio to deviate from its true value.
  • The ratio is affected by the currency in which gold and silver prices are quoted, and can be distorted if prices are quoted in different currencies.
  • The ratio is only a snapshot of the relative prices of gold and silver at a given point in time, and may not accurately reflect the true value of either metal.

Other approaches related to Gold-silver ratio

In addition to the price of gold and silver, there are several other approaches to determining the gold-silver ratio. These include:

  • Monitoring the demand and supply of both metals: By monitoring the global demand and supply of gold and silver, one can understand the current relationship between the two metals. This can help in forecasting future price trends.
  • Looking at the historical ratio: By looking at how the gold-silver ratio has changed over time, it is possible to get a better understanding of the current trend and make more accurate forecasts.
  • Considering global economic factors: Economic conditions, such as inflation, exchange rates, and interest rates, can affect the gold-silver ratio. By considering these factors, one can gain an understanding of how the ratio may move in the future.
  • Analyzing investor sentiment: Investor sentiment can also have a significant impact on the gold-silver ratio. By looking at the public's opinion of both metals and how it may affect the demand for each, one can gain further insight into how the ratio may move.

In summary, there are several approaches to understanding the gold-silver ratio, such as monitoring the demand and supply of both metals, looking at the historical ratio, considering global economic factors, and analyzing investor sentiment. By using a combination of these approaches, one can get a better understanding of the current gold-silver ratio and make more accurate forecasts.

Footnotes

  1. (S. Vigne, et al. 2017, pp. 28 - 30)
  2. (P. Arendas 2015, p. 285)
  3. (J. A. Batten, et al. 2012, p. 12 - 14)
  4. (S. Vigne, et al. 2017, p. 32)
  5. (P. Arendas 2015, p. 285)
  6. (S. McGuire 2013, pp. 75 - 86)
  7. (S. McGuire 2013, pp. 75 - 86)
  8. (S. McGuire 2013, pp. 75 - 86)
  9. (S. McGuire 2013, pp. 75 - 86)
  10. (J. Novotný, J. Polách 2016, p.6)
  11. (D. Passoja 2015, pp. 4 - 5)

References

Author: Aleksandra Morzywołek