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How To Use The Gold Silver Ratio As The Best Way To Invest

Updated on April 15, 2016

During times of inflation or low interest rates, investing in precious metals becomes increasingly popular. The most popular of the precious metals are gold and silver. The traditional method of investing is to purchase gold and silver and thus gradually increase your holdings of precious metals. This can become quite costly over time, especially when prices of gold and silver continue to rise.

For some, the need arises to increase your existing holdings of precious metals without purchasing additional quantities of these precious metals. The solution for these people is to invest by utilizing the fluctuations in the gold-to-silver or GSR ratio, the price of gold divided by the price of silver.


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What everyone should know about gold and silver

  • It is generally agreed that silver is about 15 to 17 times more abundant than gold in the earths crust. Historically, both gold and silver were monetary metals used all over the world.
  • Despite being only 15 to 17 times less abundant than silver, gold has been worth much more than 17 times the price of silver starting from the 20th century.
  • Starting from the beginning of the 20th century, the Gold Silver Ratio has varied between roughly 1:15 to roughly 1:90. Most of the time, between 1:30 and 1:60. Prior to this, the Gold Silver Ratio used to be much lower.
  • This change coincided with the halt in issuing gold and silver-based coinage for use as money. Nowadays, silver is mostly an industrial metal with an important investment element. Gold is still mostly used as a store of value.
  • Gold and silver tend to move together. When gold rises, silver rises even faster. When gold drops, silver drops even faster. Silver is much more volatile than gold.


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How to invest using the Gold Silver Ratio?

The constant rise and fall in the Gold Silver Ratio can be used to increase your precious metals holdings. The basic rules to remember are very straight forward.

  • When the Gold Silver Ratio increases, convert some of your gold into silver. The idea here is to sell gold when the price is high relative to silver and use the proceeds to buy silver.
  • When the Gold Silver Ratio decreases, convert some of your silver to gold. The idea here is to do the exact opposite. Sell silver when the price is high in order to buy gold when the price is low. In other words, buy low and sell high.
  • The various Gold Silver Ratios are divided into separate sections. Once the Gold Silver Ratio hits a certain section, a re-balancing of your gold and silver holdings in terms of percentages takes place.
  • Re-balancing takes place once in each section. The next re-balancing takes place only when the Gold Silver Ratio leaves the current section it's in and moves into another section. As long as the Gold Silver Ratio stays within a single section, no re-balancing takes place.


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How to use the Gold Silver Ratio with this example

The table below is an example of a possible course of action. When the Gold Silver Ratio hits 1:15 or below, it is time to convert all your precious metals holdings into gold. When it reaches 1:76 or above, your entire holdings should consist of silver using this table.

Note that everyone can adjust their own rules as they see fit as long as the basic rules are adhered to.

  • For example, whether you decide to convert everything into silver when the ratio is 80 or 90 is all up to you. As long as you convert just once within each section. To convert a second time requires moving into another section.
  • You can adjust the percentages of your precious metals. You may decide to always keep a minimum of 10 percent in either gold or silver. In this case, when the Gold Silver Ratio hits 1:76 or somewhere above, your holdings should consist of 90 percent silver and a minimum of 10 percent in gold.
  • The cutoffs of each section can also be adjusted. For example, you may decide to merge the last two sections. When the Gold Silver Ratio hits 1:61 or above, your precious metals will be 90 percent in silver.
  • Ratio sections should not be made too small. That results in too many swaps being required. Remember, every re-balancing involves transaction costs, which can really add up if there are too many of them.


Gold Silver Ratio
Gold-to-Silver Holdings in Percentage Terms
1:15
100:0
16:30
80:20
31:45
60:40
46:60
40:60
61:75
20:80
76:90
0:100
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Putting it all to work

The following table illustrates how this all works. Assume the Gold Silver Ratio is currently 1:50 and investor A precious metals holdings consists of 16 troy ounces of gold and 1200 troy ounces of silver. According to the previous table, his holdings should consist of 40 percent gold and 60 percent silver. The total value is $60,000 at a price of $1,500 an ounce for gold and $30 an ounce for silver.

  • After the Gold Silver Ratio falls to 1:40, investor A goes from 40 percent gold to 60 percent gold. His silver holdings goes from 60 percent to 40 percent.
  • The Gold Silver Ratio goes down again to 1:30. Investor A should have 80 percent in gold and 20 percent in silver.
  • The Gold Silver Ratio rises back to 1:40. Investor A goes back to 60 percent in gold and 40 percent in silver.
  • The Gold Silver Ratio reaches 1:50 again. Investor A has 40 percent in gold and 60 percent in silver.

Gold Price
Silver Price
GSR Ratio
Gold Quantity
Silver Quantity
Total Value (Before swap)
$1,500
$30
1:50
16
1200
(16 * $1,500) + (1200 * $30) = $60,000
$1,600
$40
1:40
($73,600 * 0.6) / $1,600 = 27.6
($73,600 * 0.4) / $40 = 736
(16 * $1,600) + (1200 * $40) = $73,600
$1,800
$60
1:30
($93,840 * 0.8) / $1,800 = 41.71
($93,840 * 0.2) / $60 = 312.8
(27.6 * $1,800) + (736 * $60) = $93,840
$1,600
$40
1:40
($79,248 * 0.6) / $1,600 = 29.72
($79,248 * 0.4) / $40 = 792.48
(41.71 * $1,600) + (312.8 * $40) = $79,248
$1,500
$30
1:50
($68,354.4 * 0.4) / $1,500 = 18.23
($68,354.4 * 0.6) / $30 = 1367.09
(29.72 * $1,500) + (792.48 * $30) = $68,354.4

You can grow your gold and silver using the gold-to-silver ratio

Investor A has increased both his gold and silver holdings by utilizing the gold-to-silver ratio, despite prices going back to where they were. His only expenses are the transaction costs associated with swapping one precious metal for the other.

It's the fluctuations in the gold-to-silver ratio that makes it all work. The individual price for gold and silver don't really matter. The ratio stays 1:50, regardless of whether the price for gold is $1,500 and silver $30 or gold is $2,000 and silver $40.


Conclusion

Utilizing the Gold Silver Ratio is an alternative method of investing in precious metals available to everyone. It can be used regardless of how one is invested in precious metals. Whether that is through bullion or through equities such as Exchange Traded Funds. Other precious metals such as platinum can also be used.

It doesn't require any additional purchases of precious metals. You only use what you already have if that's what you want. The only costs are the transaction costs associated with converting one metal to the other. This can be reduced by friends and family pooling their holdings together to lower transaction costs. As long as the Gold Silver Ratio continues to go up and down, your precious metals investments should continue to grow.

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    • pawnshopnearme profile image

      saddiq 2 years ago from USA

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    • pawnshopnearme profile image

      saddiq 2 years ago from USA

      Thanks very much

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      HubSnub 2 years ago

      The selling/purchasing costs are the big question here. How do you minimize these costs?

    • johntsang profile image
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      johntsang 4 years ago

      Only buy when things are cheap and sell when things are expensive.

      If range bound, be patient. Sooner or later, prices will break out in one direction.

    • profile image

      kourosh1347 4 years ago

      Hi Tanx for article

      When we can buy ?. And in the last year has been between 48 to 68