The Gold-Silver Ratio Explained

Introduction

Precious metals commentary often mentions the gold-silver ratio. It is a single number that compares the two metals, and people use it to describe whether silver looks expensive or inexpensive relative to gold.

The number itself is simple. What it means is less simple. This note explains how the ratio is calculated, why it moves, and the limits of using it as a signal. It contains no current prices and no view on where either metal is heading.

The ratio tells you how two prices compare today. It does not tell you which one will change.

How It Is Calculated

The ratio is the gold price divided by the silver price:

Gold-silver ratio = price of one ounce of gold ÷ price of one ounce of silver

A hypothetical example: if gold were 1,000 dollars an ounce and silver were 20 dollars an ounce, the ratio would be 50. It would take 50 ounces of silver to buy one ounce of gold. These are round numbers for illustration, not real prices.

Two practical points:

• Use matching prices. Both prices should be in the same currency, per troy ounce, and from the same moment. A daily benchmark is a common choice. The LBMA Gold Price and LBMA Silver Price, administered by ICE Benchmark Administration, are set by auction in US dollars, gold twice a day and silver once.
• The ratio is unitless. Because both prices are per ounce in the same currency, the currency cancels out. The ratio is the same in Canadian or US dollars if both prices are converted at the same exchange rate.

A Ratio That Used to Be Fixed

For a long time, governments set the relationship between gold and silver for coinage. The United States Coinage Act of 1792, for example, set the proportional value of gold to silver in its coins at fifteen to one, by weight of pure metal.

That was a legal rate for minting money, not a market price. In modern markets, gold and silver trade freely and their prices are set by supply and demand. The ratio is now an outcome of two separate markets, not a rule linking them.

This history is sometimes used to argue that the ratio should return to a level like 15. There is no mechanism that makes it do so. A legal ratio set for coinage tells you little about a market where no law ties the two prices together.

Why the Ratio Moves

Gold and silver are both precious metals, but their markets differ in ways that push the ratio around.

Demand. The U.S. Geological Survey's Mineral Commodity Summaries show the contrast. Estimated global gold consumption is dominated by jewellery, physical bars and central banks. Silver, by contrast, has large industrial uses. In the United States its estimated uses include electrical and electronics, photovoltaic solar cells, and brazing and solder, alongside investment bars, coins and jewellery. Silver's price can therefore respond to industrial activity in a way gold's generally does less.

Supply. According to the USGS, although silver is the principal product at some mines, it is primarily obtained as a by-product of lead-zinc, copper and gold mining. That means silver supply depends partly on the economics of other metals. A change in base metal mining can change silver output whatever the silver price is doing.

Investment flows. Both metals are bought as investments, in bars, coins and other products, and investment demand for one can change without the other following. For a fuller view of each market, see our notes on silver as an industrial and monetary hybrid and on why gold moves with real interest rates.

Limits as a Signal

The ratio is often used in a simple way: a high ratio is read as "silver is cheap relative to gold", a low ratio as the reverse, with the idea that the ratio will revert to some average. There are good reasons to be careful with that reading.

1. No fixed anchor. The legal ratios of the past do not apply to modern markets, and the long-run average depends on which period you choose.
2. Changing fundamentals. Silver's industrial uses and its by-product supply change over time. An average from one era may not suit another.
3. Two moving parts. A change in the ratio can come from gold, from silver, or from both. A falling ratio might mean silver rose, or gold fell, which are very different outcomes for an investor.
4. Timing. Even if a ratio did tend back toward some level, it says nothing about when.

The ratio is best used as context: a quick way to see how the two metals have moved relative to each other.

Why It Matters for Mining Companies

For investors in junior and producing miners, the ratio has practical uses:

• Revenue mix. A mine producing both metals earns a different mix as the ratio changes. A company that reports gold-equivalent ounces has to convert its silver at some price ratio, so its reported equivalent production depends on the prices it chose.
• Equivalent grades. Silver-gold projects often report gold equivalent or silver equivalent grades. Those depend directly on the assumed prices, which is to say on an assumed ratio. Check the individual grades and the price assumptions behind any equivalent figure.
• Study assumptions. In a technical study, the gold and silver price assumptions imply a ratio. Comparing that implied ratio with the historical range is a quick consistency check.

What to Check

• The prices used. Same currency, same time, same benchmark.
• Which metal moved. Look at gold and silver prices separately, not just the ratio.
• Equivalent figures. In company disclosure, the gold and silver prices behind any equivalent grade or equivalent ounce.
• The time frame. Any claim about an "average" ratio depends on the period chosen.

The gold-silver ratio is a useful way to describe two markets side by side. It is not a reason on its own to buy or sell either metal. For decisions, use primary sources and speak with your own adviser.