The Gold/Silver Ratio Says Silver’s Still Cheap

The silver price has dipped since December, from almost $26 per ounce to around $22 today. We reported on silver being a relative bargain at the time, and with lower spot prices and an even higher gold/silver ratio today, gold’s monetary sibling is looking like an even more attractive buy than it was late last year.

The gold/silver ratio refers to how many ounces of silver would buy a single ounce of gold, and at one point, the number was fixed by law. A lot has changed since then, with gold no longer backing the US dollar, and a whole array of precious metals-linked financial products like futures and ETFs adding to the complexity of the market.

Without a legally imposed gold/silver ratio or dollar peg, the number is now free to fluctuate and can be a valuable tool when considering if it’s a good time to buy. Gold has been on a tear lately, hovering not far from its all-time high last December when it topped at over $2,100 per ounce. The price of silver often follows suit.

A high gold/silver ratio signals that silver is being potentially undervalued, and in December the number was 81-1, far above the modern average between 40-1 to 60-1. Since then, it has ratcheted up another 5-10 points, currently above 1-90.

The last time the ratio was higher than it is now was in August 2022, when it hovered around 95 ounces of silver for one ounce of gold. From then until April the following year, the price of silver worked its way up from around $20 an ounce up to a high of $25 before retracing again. It will be interesting to see if the ratio touches these levels again (or beyond) — and if we see a similar bull market for silver in the next 6-8 months. The following chart shows the gold/silver ratio since April 2022:

In the context of bargain-price silver, the best bet is still using it as a companion to gold as a long-term inflation hedge rather than cashing out on short or medium-term trades. Even perfectly-timed buys and sells are subject to capital gains taxes and other mark-up. If you zoom out, industrial demand for silver is expected to skyrocket in the next decade, and history has proven that silver will always be a better form of money than fiat.

The long-term fundamentals are as solid as ever, while the high gold/silver ratio is a bullish sign for silver on a shorter time scale especially when the Fed finally decides to cut rates later in the year. As noted in The Silver Institute’s January report:

“…the Fed is expected to signal further and accelerated easing next year. The impact of falling real yields and pressure on the U.S. dollar should also favor fresh silver and gold investment.”

So, with the Fed expected to fire up its money printers again soon, cutting rates and funding expanding global conflicts with new debt, silver traders would be better off accumulating bullion to beat inflation over the long-term instead of gunning for short-term taxable returns by trading in and out of a rapidly-depreciating currency.

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