What Is the Gold/Silver Ratio?
The gold/silver ratio measures the number of ounces of silver required to purchase one ounce of gold. By measuring the change in the gold/silver ratio over time, investors hope to estimate the relative valuations of the two precious metals, thus informing their decisions of which metal to buy or sell at any given time.
- The gold/silver ratio measures the price of gold relative to silver.
- The ratio is used by investors as a gauge of the relative valuation of the two metals, which can help inform buy and sell decisions.
- During the Roman Empire, 12 ounces of silver bought 1 ounce of gold.
How the Gold/Silver Ratio Works
Because gold and silver prices change based on the law of supply and demand, the gold/silver ratio has fluctuated over time. Before the adoption of the fiat currency system, national currencies were often backed by gold or silver. This meant the gold/silver ratio was far more stable in the past than it is today. Indeed, it would often be fixed at specified exchange rates relative to units of national currency. These exchange rates would change based on the perceived economic strength of the nation in question.
In 1913, the Federal Reserve was required to hold gold equal to 40 percent of the value of the currency it had issued. A significant change occurred in 1933, when President Franklin D. Roosevelt suspended the gold standard to stem redemptions of gold from the Fed. This, along with other measures, weakened the link between the dollar's value and gold. Many observers view this event as the moment when the U.S. dollar became a de-facto fiat currency, after which the role of governments in setting the price of gold and silver steadily declined.
Real World Example of the Gold/Silver Ratio
To illustrate the gold/silver ratio, consider a scenario in which gold is trading at $1,500 per ounce and silver is trading at $15 per ounce. The gold/silver ratio would be 100, because it would take 100 ounces of silver to purchase 1 ounce of gold.
As of December 2020, the gold/silver ratio was about 75, down from 114 in April 2020. The ratio has steadily climbed since reaching a nadir of 31 in April 2011.
Interestingly, because precious metals have been prized commodities for thousands of years, it is possible to calculate approximate gold/silver ratios within some ancient economies. For example, during the Roman Empire, the gold/silver ratio was often fixed at 12:1.