Everything You Need to Know About the Gold-Silver Ratio

Historically, the world’s currency system was backed by gold and silver. The gold-silver ratio gained importance as governments worldwide maintained reserves in the precious metals to keep their currency valuations high. In 1933, the then US President, Franklin D. Roosevelt, suspended the gold standard for currencies. However, the ratio remains a significant parametre for precious metal traders. Understanding historical trends can help identify when the gold-silver ratio is likely to rise or fall. They can also be used to identify reversal or normalisation points, signalling trading opportunities for the two precious metals.

Gold-Silver Ratio

The gold-silver ratio, also known as the GSR, is the number of ounces of silver required to buy one ounce of gold. The ratio fluctuates in response to the price movements in the two precious metals.

Calculating the GSR:

Current price of one ounce of gold ÷ current price of one ounce of silver

On February 18, 2025, the gold-silver ratio stood at 89.90. This means that one ounce of gold could be purchased in exchange for 89.90 ounces of silver. Year-to-date, the ratio had remained over 82 and appeared to be rising.

For a major part of the 21st century, the GSR has ranged between 40 and 80. However, it hit a low of 30.76 in April 2011 while peaking at 112.30 in May 2020.

What Moves the Gold-Silver Ratio?

Gold and silver historically move in the same general direction. According to The Silver Institute’s February 2024 report, major price swings in the yellow metal were followed by similar movements in silver in the past 50 years. Notably, in the longer run, the amplitude of price swings in gold is lower than that of its poorer cousin. Consequently, there’s a broader view in the precious metal trading community that XAU rallies and pullbacks are followed by those in the XAG. Here’s a look at the prominent factors that drive movements in the GSR.

Geopolitical Conflict

Gold is considered a safe haven asset and silver is its more affordable alternative. Geopolitical conflicts push investors to preserve their portfolio values, which in turn drives gold and silver demand. The 2020 high in the GSR was due to gold being a trusted safe haven during times of market turmoil and uncertainty.

US Dollar Price

The yellow metal is negatively correlated to the greenback. As the USD rises, XAU becomes costly to purchase with other currencies. Additionally, both being safe havens, XAU competes for demand with USD. Being a non-yielding asset, the demand for gold declines, weighing on its price.

Central Bank Demand

Central bank actions, such as buying or selling of gold reserves, influence gold prices significantly. This may lead to a change in the GSR.

Industrial Demand

Silver is the most heavily used precious metal in the medical, EV and PV sectors. The demand from these industries moves XAU prices, which impacts the gold-silver ratio. Gold, on the other hand, has less significant use in industries, but is widely used for jewellery making.

Demand-Supply Equilibrium 

The supply of both precious metals depends on mining production and recycling capacity. Notably, silver supply has been under pressure since 2022, pushing its price higher. The change in the supply-demand equilibrium of either metal may impact the gold-silver ratio.

Trading Precious Metals with the Gold-Silver Ratio

The GSR works as an efficient mechanism to determine which precious metal has a more suitable trading opportunity relative to the other. Popularly, traders use the gold-silver ratio to determine which metal is undervalued or overvalued and make buy and sell decisions accordingly. However, experienced traders combine the GSR with technical indicators, such as Bollinger Bands, MACD, OBV, RSI, ADX, etc., to make informed decisions. Here are a few examples of popular gold-silver ratio trading strategies:

Accumulation Trading

In this technique, traders accumulate the two precious metals, trading one for the other based on the GSR ratio:

High Gold-Silver Ratio

Over the years, there has been a huge variation in the range of GSR. The ratio is considered high when it breaches the support and resistance levels for 50 or 200 trading days (according to the trader’s time horizon) when plotted on a chart. A high GSR indicates that silver is undervalued. Traders use this as an opportunity to buy silver against an equivalent value of gold.

Low Gold-Silver Ratio

A low gold-silver ratio indicates a buying opportunity for gold. This is a time when traders prefer to buy gold against an equal value of silver. 

Derivative Trading

Using derivative instruments, such as contracts for difference (CFDs), is a popular technique for trading precious metals. CFDs allow traders to take advantage of rising and falling prices. Moreover, CFDs are traded on margin, which lowers the entry barrier while leverage amplifies traders’ purchasing potential. This allows them to explore more trading opportunities. However, higher exposure translates into higher potential losses or profits. Therefore, risk management is critical while trading precious metals using CFDs.

Gold-Silver Ratio in Uptrend

When the GSR is steadily rising, the movement between the price of gold and silver is used to make trading decisions. If a rising gold-silver ratio is accompanied by an uptrend in both gold and silver prices, it is a signal to buy gold. If both are in a downtrend, it is a signal to short-sell silver. This is because the decline in silver tends to be greater than that in gold.

Gold-Silver Ratio in Downtrend

If the GSR declines while gold and silver prices climb, it is considered a signal to buy the XAG. If the prices of the two precious metals also decline with the gold-silver ratio, it is an opportunity to short-sell XAU.

To Sum Up

• The gold-silver ratio is a long-standing trading tool for precious metal traders.
• The highs and lows of the GSR help traders identify trading opportunities.
• Factors that impact the individual prices of XAU and XAG can potentially move the GSR. 
• Traders popularly use CFDs for trading precious metals.
• Risk management is paramount while trading via CFDs.

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