Is the Gold-to-Silver Ratio Falling from Its Peak?



Ratio falls from its peak

The ratio of gold to silver measures how many ounces of silver it takes to buy an ounce of gold. A higher ratio denotes a large number of silver ounces required to purchase a single ounce of gold. A higher spread, or ratio, means the yellow metal is outperforming the white metal and vice versa. With gold and silver prices at ~$1,146 and $15.98 an ounce, respectively, the ratio currently stands at 72.1824 as of October 6, 2015. The ratio has fallen steadily since it reached a peak of nearly 80 in August after China spooked the international markets. The ratio had been around 60 in 2013. Below is a chart that gives the gold-silver spread analysis over the past two months.


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Silver gains, gold struggles

It seems that the ratio reached its peak due to the slowdown in global economic growth. Silver is highly sought for its industrial use. The fall in economic activity and aggravated concerns of China’s industrial growth following its currency devaluation led to a fall in silver prices. Silver prices are substantially affected by industrial growth.

China is the number one commodity and raw material buyer. A fall in the white precious metal leads to a drop in the gold-to-silver ratio, which means it takes more silver ounces to buy gold. Currently however, silver is leading. Silver has risen a whopping 9.73% in the past five trading days. Gold, however, has risen only 2.92% on a five-day trailing basis, leading to the steep fall in the gold-to-silver ratio over the last week.

Other investments

Gold and silver have had a historical correlation of close to 0.90. Global uncertainty and industrial growth seem to be the most crucial factors affecting the gold-to-silver ratio. Other investments that are affected by changes in the prices of gold and silver are the Global X Silver Miners ETF (SIL) and the VanEck Vectors Gold Miners ETF (GDX). Component mining companies of the GDX ETF that are affected include IAMGOLD Corp (IAG), New Gold (NGD), and Hecla Mining Company (HL). These three stocks together constitute 4.43% of the GDX ETF.


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