The so-called gold-to-silver ratio, the price of gold divided by the price of silver, currently stands at 39.8 to 1. In other words, a single ounce of gold is worth 39.8 ounces of silver. That’s a decline from the end of 2010, when the ratio was around 46.
Silver has surged 29% year to date to about $40 an ounce, compared with gold’s 13% year-to-date advance, to just over $1,600 an ounce.
“Some traders look at the gold-silver ratio as a way to determine if one commodity is over or undervalued relative to [the] other,” said Paul Simon, chief investment officer at Tactical Allocation Group.
“This can open up statistical-arbitrage opportunities, where a trader may try shorting the overvalued commodity and buying the undervalued commodity, with the hope of profiting from the reversion to the mean,” he said.
Comparing gold prices to those of silver “gives a good relative feel for the price fluctuations between the two metals,” said Matt Insley, editor of the Daily Resource Hunter. “Plus, it’s another tool for metals traders to gauge future metals trends.”
But analyzing the gold/silver ratio’s levels is a complicated task.
The 200-year average for the gold to silver ratio sits around 37 to 1, said Insley, and the ratio now stands very close to that historic average.