What is Gold / Silver Ratio?
When you're looking to purchase precious metals like gold or silver, the gold-silver ratio tells you how many troy ounces of silver you can purchase for the same amount of gold.
The data can be used to assist in purchasing decisions for silver or gold. Analytic investors use several factors when making buying decisions. One such decision is the percentage of premium to the spot price. The other is the gold/silver ratio!
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In this time of economic uncertainty, we are all challenged to diversify our portfolios to ensure we have enough savings for retirement. One method of diversification is acquiring assets that appreciate in value over time.
Buying a physical assets such as gold or silver coins or bars is one way to diversify a portfolio.
If you are retired or nearing retirement, acquiring precious metals using a retirement account such as a Self-Directed IRA or Gold IRA is an excellent choice.
An SDIRA can be funded like other IRA accounts by using earned income during the prior calendar year. Alternatively, you can contribute more by rolling over retirement funds from an existing IRA or previous employer's 401K.
That being said, if you're searching for more information on which Gold Dealers may be best for you, take a moment to review our article 5 Best Gold IRA Companies and get more details of the top Gold and Silver IRA dealers available.
Our #1 recommendation is Goldco. They'll provide you with the best FREE information source, and their goal is to educate clients on diversifying retirement savings. Start educating yourself TODAY by reading their free kit; click the link below.
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Key Takeaways From This Article:
How is The Spot Price of Gold and Silver Determined?
The spot price of gold and silver is determined through a variety of factors in global financial markets. While I can provide a general overview, it's important to note that market dynamics can change over time, and the exact mechanisms can vary.
- Global Supply and Demand: The fundamental principle of supply and demand plays a significant role in determining the spot price of gold and silver. Factors such as mining production, central bank reserves, industrial demand, jewelry demand, and investor sentiment all impact the overall supply and demand dynamics.
- Futures and Derivatives Markets: Gold and silver futures contracts traded on commodities exchanges, such as the COMEX (Commodity Exchange) in the United States, provide a mechanism for participants to speculate on the future prices of these metals. The trading activity and sentiment in these markets can influence the spot prices as well.
- Currency Exchange Rates: The spot price of gold and silver is typically quoted in major currencies like the US Dollar. Changes in currency exchange rates can affect the spot price since a stronger currency tends to decrease the price of precious metals, making them relatively more expensive in that currency.
- Economic Indicators: Economic indicators such as inflation rates, interest rates, GDP growth, and geopolitical events can impact the spot price of gold and silver. For example, during times of economic uncertainty or inflationary pressures, investors often seek the relative stability and safe-haven qualities of gold and silver, which can drive up their prices.
- Market Sentiment and Investor Behavior: Sentiment and investor behavior, driven by factors like market speculation, risk appetite, and macroeconomic trends, can significantly influence short-term fluctuations in the spot price of gold and silver. News events, market rumors, and investor sentiment can trigger buying or selling pressure, impacting the spot prices.
It's important to note that while the spot price reflects the current trading value of gold and silver, individual dealers or market makers may add a premium or spread to the spot price to cover their costs, such as refining, storage, and transportation when buying or selling these metals.
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Gold Silver Ratio Calculation
To calculate how much silver you can buy with the same dollar amount as gold the calculation is simple.
First, determine what the troy ounce price of silver is for today!
Second, determine what the troy ounce price of gold is for today!
Troy ounce of gold / Troy ounce of silver = gold-silver ratio
Real-World Example:
As of July 18, 2023, the spot price of gold is $1,989.30 and the spot price of silver is $25.27.
1989.30/25.67=77.50
That tells you that if you were to buy 1 oz of gold at $1,989.30 you would be able to buy 77.5 ounces of silver for the same initial investment.
The gold/silver ratio is ever-changing. Historically, there were times the ratio was fixed but today it is liquid.
Interpreting the Gold-Silver Ratio Calculation
Is a good ratio 80:1 or 100:1 - how do I know what is a good ratio?
As an investor, you know that silver is undervalued the further it gets from 1:1. Many believe if the gold-silver ratio is above 50:1 the silver is undervalued. In reverse, as the ratio gets closer the value of gold is undervalued in comparison to silver.
Buying silver today you can get 77.5 ounces of silver for every ounce of gold. Thus, if the value of silver increases at a higher percentage than gold, you will make a profit.
- In 2020 the ratio peaked at 123.5:1
- At the end of the 19th century the ratio was fixed at 15:1
- 1980's precious metals boom had a ratio of 17:1
As an investor, you can determine your own ratio that makes sense for your gold and silver buying. If you think silver is undervalued at 80:1 then any purchase over 80 would be a good option.
Does the Gold-Silver Ratio Consider the Premiums?
No, premiums are not part of the equation for the gold/silver ratio. Premiums are based on the seller's cost. When coins or bars are produced there is a cost to mint or pour the metals. The spot price recognizes the commodity price for bullion being traded.
Premiums incorporate any profit for the company based on what each dealer paid for their coins or bars.
When buying any precious metal consider the premiums being paid. Spot price - retail price is the premium.
When you sell your metals back to a dealer or local coin shop you will rarely ever get a price over the current melt or spot price. Therefore, any premiums paid will likely never get recovered.
Gold dealers recommend a 10-year hold on precious metals. The expectation is time will be positive and the value of gold or silver will rise above what was paid for the item including the premium.