How To Trade The Gold-Silver Ratio In A Crisis

The gold–silver ratio reached an extreme high of about 126.43 on March 18 in the wake of the COVID-19 economic downturn. Any experienced metals investor knows the significance of that level that has never been reached before. One expert even referred to it as a 5,000-year high.

Why All This ‘Noise’?

For starters, the gold-silver ratio refers to the amount of silver needed to acquire an ounce of gold. On March 18, traders needed 126.43 ounces of silver to buy one ounce of gold. But, currently, the gap has reduced to roughly 110-to-1, still a record high.

When the silver-gold ratio rises, it means that gold is outperforming silver, and when it falls, it means that silver is outperforming gold. The seasoned investors believe that the ratio will soon fall back to its average, which is debatable.

Some say it should go back to the Mint Act of 1792 set at 15-to-1; others say it should drop to the 20th-century average of 47-to-1. Others believe that the new standard is between 50-to-1 and 70-to-1. Whatever the case, 126-to-1 is quite high.

A high ratio means that silver is underperforming gold and thus a potentially good investment. Many expect the ratio to drop from the elevated levels. But is it an excellent time to jump in as a recession looms on the horizon? Here is how the gold-silver ratio performed in past downturns.

Performace Since 1970

The gold-silver ratio tends to rise in many of the past recession periods. That happens since gold enjoys higher inflows due to investors seeking safety. After that recessionary period, the gold-silver ratio tends to fall back again. When that happens, silver outperforms gold. If silver is a haven asset and a form of ‘sound money,’ why does it play second fiddle to gold?

One reason is that investors may prefer gold to silver, which drives up prices of the precious yellow metal against silver’s second-place status. Gold is rarer. When gold backed a currency it was known as ‘gold standard’ and not the ‘silver standard.’

Apart from that, silver is also an industrial metal and doubles up as a precious metal. The industrial wheels seem to ramp up as the economies recover from the recessionary slumps. When industry ramps up, the demand for silver’s industrial consumption surges.

Hence, both a recessionary period and a high gold-silver ratio provides an excellent opportunity to invest in this market. In these cases, you are anticipating a possible surge in silver prices when the economy recovers from recession. A high gold-silver ratio may be an ideal indicator showing a favourable time to buy.

How To Invest In The Gold-Silver Ratio

Gold might rise further despite the high ratio levels currently existing. If gold appreciates faster than silver, the ratio will grow bigger. Nobody can predict where this ratio will go, especially during this COVID-19 economy. The health crisis is still pulverizing economies, and it is not yet clear how much investors will need to invest in haven assets.

That means that there always exist speculative risks whenever you are investing in silver. No form investment is a sure winner, and any efforts to time the market are frequently met with much disappointment. Please note that forecasts are based on current economic and market conditions. These factors keep changing, which might turn out to be favourable or unfavourable to any market, including silver.

The nature of the gold-silver ratio level is an evident example of unpredictable market conditions. The precious metals investors may believe that the current high levels are a favourable entry range. They aim at accumulating small chunks of silver allocations every time. Silver prices may eventually surge as traders try to exploit the wide gap between the two metals.

However, it is highly likely that silver will appreciate as the global economy kick starts its industrial engines, industrial silver surging along with safe-haven demand. Thus, experts now believe that silver is at a reasonable investment range where investors can acquire it a little at a time.

Investors might have to wait a little bit to see whether silver will rise. But, for the long-term traders, this is a perfect investment opportunity. It is all about exploiting a never-before-seen ratio level and accumulating a “sound money” and safe-haven asset at significantly low prices.