Gold ratios show how other investment products such as other precious metals, the Dow Jones Industrial Average and oil compare to the value of 1 ounce of gold. If the ratio is 10-to-1, an investor would use 10 shares or ounces of an investment to purchase 1 ounce of gold. Understanding how fluctuations in gold ratios can affect the market can help investors determine if now is the right or wrong time to buy or sell specific investment products.
Commonly known as the mint ratio, the gold-to-silver ratio shows the relative value an ounce of silver has to an equal amount of gold. Investors use gold ratios to help determine how much precious metal stock is in their portfolios. Why is this ratio so valuable for traders and investors? If they’re able to anticipate where the gold-to-silver ratio will move, they may still be able to make a profit even if the value of either of the metals rise or fall.
Importance of Gold-to-Silver Ratio
Even though it doesn’t have a fixed ratio, the gold-to-silver ratio is popular among precious metals investors. Many use it to help hedge bets for both metals, keeping a short position in one metal while taking a long position in the other. When the gold-to-silver ratio is higher, and traders think it may drop along with the price of silver compared to gold, they might decide to purchase silver and take the same amount of gold in a short position.
To make this happen, it’s important to understand how the gold-to-silver ratio works. If gold is trading at $250 per ounce and silver is trading at $10 per ounce, the gold-to-silver ratio would be 25-to-1. Currently, the gold-to-silver ratio is fluid and can make drastic swings. This is because market forces value gold and silver daily, but this hasn’t always been the case. Throughout history, governments attempting to gain monetary stability have permanently set the gold-to-silver ratio.
The gold-to-silver ratio continues to fluctuate in modern times, never remaining the same. This is mainly due to the prices of gold and silver regularly experiencing wild swings on a daily basis. Here is a brief historical overview of the gold-to-silver ratio:
- 1980: During the last significant surge in silver and gold prices, the gold-to-silver ratio was 1-to-1.
- 1991: Silver hit a record low with the gold-to-silver ratio peaking at 100-to-1.
- 2007: The average gold-to-silver ratio was 51-to-1.
The gold-to-silver ratio is often used as an indicator of precious metals markets. When this ratio is high, it’s typically corresponding with a cyclical low trend in the prices of precious metals. As the ratio begins to narrow, it usually corresponds with a cyclical bull market for precious metals.
Many perceive the world’s three most important prices as the price of gold, the price of money and the price of oil. The gold-to-oil ratio encompasses two of these three showing how many barrels of oil are required to purchase 1 ounce of gold.
Importance of Gold-to-Oil Ratio
The 2020 COVID-19 pandemic has had a significant impact on the global economy, with the gold-to-oil ratio reaching historically high levels. For instance, on April 20, 2020, 1 ounce of gold purchased more than 400 barrels of oil. This is nine times more than levels reached in early 2016 during panic lows and 10 times the record previously reached in 1933 during the depths of the Great Depression.
Oil and gold have both experienced busts and booms, financial panics, wars, flat dollar standards, gold exchange standards, gold standards, floating and fixed exchange rates, oil shortages, oil market wars, periods of calm, pandemics and geopolitical tensions. Despite these vastly different backdrops, the gold-to-oil ratio has been between 10-to-1 and 30-to-1 for 80% of the time.
Other Important Gold Ratios
In addition to the gold-to-silver and gold-to-oil ratios, there are several other gold ratios investors and traders follow to help them hedge their bets and determine the best time to buy gold and sell various investment products.
The Dow-to gold ratio illustrates how many shares of the Dow Jones Industrial Average index  it will take to purchase 1 ounce of gold. One of the oldest and most-watched indices worldwide, the Dow Jones comprises 30 large, publicly traded U.S.-based companies. Two significant points in the Dow-to-gold ratio coincide with important dates in market history, including:
- In 1929, 1966 and 1999, the Dow-to-gold ratio and the stock market both saw historic highs.
- In 1932 and 1980, both of them hit historic lows.
Another valuable gold ratio is the platinum-to-gold ratio, which gauges if platinum is trading at a discount or premium to gold. With a 30-year average of 0.89:1, this gold ratio has seen a steady incline since mid-2014, jumping to a 2.4:1 ratio in March 2020 amid the COVID-19 pandemic. Some investors believe the gold-to-platinum ratio is a good indicator in forecasting stock market trends. Many feel platinum as primarily reflecting industrial demands, while gold can reflect both industrial demands and investor demand for hedging against geopolitical and economic trouble.
Gold-to-S&P 500 Ratio
The relationship between the price of gold and the value of stocks is widely debated. The general view is these two markets are negatively linked. When stock values rise, gold prices decrease, and vice versa. This is often the case as traders view gold as a safe haven, preferring gold to high-risk stocks. This also makes gold an excellent way to diversify portfolios, allowing traders to hedge against the S&P Index.
Gold-to-Real Estate Ratio
The gold-to-real estate ratio tells how many ounces of gold are needed to purchase the average house. It can also help determine which of them is currently over or underpriced. Both real estate and gold are viewed as alternative physical assets to stocks. Some question the usefulness of this ratio as property is a vastly different asset, moving independently of precious metals like gold and silver. While gold typically performs well in financial crisis, home values typically drop.
Understanding gold ratios allows investors to monitor how other precious metals, the Dow Jones, oil and other investment products compare to 1 ounce of gold and can help them diversify their portfolio while determining when to buy and sell.
1. S&P Global, ‘S&P Down Jones Global Indices,’ https://www.spglobal.com/spdji/en/regional-exposure/global/#overview. Accessed September 15, 2020.