What is Mint Ratio
The mint ratio, or gold/silver ratio, is the price of an ounce of gold divided by the price of an ounce of silver, and is the exchange rate between the two precious metals. It is sometimes used as a proxy for market risk, and to determine whether risky assets are overvalued or undervalued.
Understanding Mint Ratio
Investors trade the ratio by buying gold and selling silver, and vice versa. The relationship between these two precious metals is taken to be a measure of investors' economic optimism, as the mint ratio is inversely correlated to risk appetite. The mint ratio rises in downturns, for example, because investors often seek out gold in periods of uncertainty and silver tends to underperform because it is an industrial metal.
Traders pay particular attention to the mint ratio when it reaches extremes, because the gold/silver ratio has always been mean reverting. Over the last 100 years, it has oscillated in big troughs, over a wide range from 16.12 to as much as 114.77.
- Mint ratio is the price of an ounce of gold divided by the price of an ounce of silver and is equal to the exchange rate between the two precious metals.
- It is used as a proxy for market risk and was inversely correlated with the S&P 500 until 2013, when both the mint ratio and S&P 500 surged.
- The daily relative strength index is closely watched by traders to determine price movement of gold and silver relative to each other.
The mint ratio has been highly correlated with the S&P 500 in the last 30 years, and oscillated between 45 and 80. But this relationship broke down in 2013, when the S&P 500 headed upward while the mint ratio soared—suggesting that the move might not be justified by fundamentals. In 2018, the mint ratio had risen to the 80 level, from a low of 35 in 2011. This might suggest that the mint ratio should decline over the next few years but could go higher if investors buy gold to protect them from inflation.
The daily relative strength index momentum indicator for the gold/silver ratio is watched closely by traders as a signal for how one metal will move relative to the other, and whether one is overbought and the other oversold versus the other.
The Mint Ratio is Fixed Under Bi-Metallic Standard
Historically, when currencies were based on gold and silver holdings, the gold/silver ratio was fixed. During the 19th century, the United States was one of many countries that adopted bi-metallic standard monetary systems, where the value of a country's monetary unit was established by the mint ratio. But the era of the fixed ratio ended in the 20th century as nations moved away from the bi-metallic currency standard and, eventually, off the gold standard entirely.
Example of Mint Ratio
Consider a mint ratio of 75. Typically, an RSI is considered overbought if it is above 70. Because gold is the numerator, it implies that the precious metal is rallying and has a high price relative to silver. This ratio, therefore, implies that either gold is overbought or silver is oversold. Future price movement predictions can be made based on individual price movements for either of the metals.