A Historical Guide to the Gold-Silver Ratio

Investors who begin to trade or follow the gold and silver markets aren't likely to go long without reading or hearing about the gold-silver ratio. The gold-silver ratio is an expression of the price relationship between gold and silver. The ratio shows the number of ounces of silver it takes to equal the value of one ounce of gold. For example, if the price of gold is $1,000 an ounce and the price of silver is $20 an ounce, then the gold-silver ratio is 50:1.

The gold-silver ratio is the oldest continuously tracked exchange rate in history. The primary reason the ratio is followed is that gold and silver prices have such a well-established correlation and have rarely deviated from one another.

The History of the Gold-Silver Ratio

Historically, the gold-silver ratio has only evidenced substantial fluctuation since just before the beginning of the 20th century. For hundreds of years prior to that time, the ratio, often set by governments for purposes of monetary stability, was fairly steady.

The Roman Empire officially set the ratio at 12:1. The ratio reached 14.2:1 in Venice in 1305 and remained at this level up until 1330 when it fell to 10:1. In 1350 it fell to 9.4:1 in some places across Europe. It climbed back to 12:1 in the 1450s. The U.S. government fixed the ratio at 15:1 with the Coinage Act of 1792.

The discovery of massive amounts of silver in the Americas, combined with a number of successive government attempts to manipulate gold and silver prices, led to substantially greater volatility in the ratio throughout the 20th century.

When President Roosevelt set the price of gold at $35 an ounce in 1934, the ratio began to climb to new, higher levels, peaking at 98:1 in 1939. Following the end of World War II, and the Bretton Woods Agreement of 1944, which pegged foreign exchange rates to the price of gold, the ratio steadily declined, in the 1960s and again in the late 1970s after the abandonment of the gold standard. From there, the ratio rose rapidly through the 1980s, peaking at 97.5:1 in 1991 when silver prices declined to a low of less than $4 an ounce.

For the whole of the 20th century, the average gold-silver ratio was 47:1. In the 21st century, the ratio has ranged mainly between the levels of 50:1 and 70:1, breaking above that point in 2018 with a peak of 104.98:1 in 2020. The lowest level for the ratio was 35:1 in 2011.

The Importance of the Gold-Silver Ratio for Investors

The practice of trading the gold-silver ratio is common among investors in gold and silver. The most common method of trading the ratio is that of hedging a long position in one metal with a short position in the other.

For example, if the ratio is at historically high levels and investors anticipate a decline in the ratio that would reflect a decline in the price of gold relative to the price of silver, investors should simultaneously buy silver while selling short an equivalent amount of gold, looking to realize a net profit from a relatively better price performance of silver compared to that of gold.

The advantage of such a strategy is that, as long as the gold-silver ratio moves in the direction an investor anticipates, then the strategy is profitable regardless of whether gold and silver prices generally are rising or falling.

Here is an example showing the outcome of such a trading strategy. From around the end of 2008 to the middle of 2011, the gold-silver ratio declined from approximately 80:1 to around 45:1.

During that period, the price of silver rose from around $11 an ounce to approximately $30 an ounce. The price of gold rose from approximately $850 an ounce to $1,400 an ounce. A 2008 buy of 80 ounces of silver against a short sell of one ounce of gold would have resulted in a profit of $1,520 in silver against a loss of $550 in gold, for a net profit of $970.

The Bottom Line

The gold-silver ratio measures the amount of silver it takes to equal an ounce of gold. The ratio remained fairly stable throughout most of history, starting to fluctuate in the 20th century.

The ratio is important to investors as they trade it with the purpose of hedging certain metal positions as well as the ability to generate profits from their positions.