The Gold Silver Ratio

The gold silver ratio (GSR for short) is the number of ounces (oz) of silver required to buy one ounce of gold (i.e. price of 1 oz silver / price of 1 oz gold). It is used by gold and silver traders to determine when to buy or sell the two precious metals. 

Unlike most other ratios where there is a generally accepted number or a range of numbers, the GSR has none. One oft-quoted number is 17.5, which is the amount of silver to gold in the Earth’s surface. However, based on the last 30 years or so, the ratio did not even hit that number, and the lowest was back in 2011 where the GSR was slightly above 30¹.

Though these two are precious metals and have a high positive correlation with each other (0.79 between 2007 and 2018²), the GSR swung wildly between the 30s and 80s during the said period, and as of now it is about 80-plus³.

Gold and silver are two of the three assets for the commodities component in The Bedokian Portfolio⁴. If your portfolio has only gold or silver, then you can take this article as knowledge. If you have both, then read on.

Gold And Silver Are The Same, Yet Different

Chemically, gold and silver belongs to group 11 in the periodic table of elements, along with copper, meaning they have similar properties such as good electrical conductivity and are used for coinage. Their current usage, however, differs with each other. Silver is used more in industrial applications, such as electronics and photography, while gold, though there are some industrial uses for it, is mostly used for jewellery and for investment purposes.

From a portfolio viewpoint, looking at both, you can say that they are akin to sectors within the equities asset class. Just like financials and consumer staples, they could be positively correlated but both can be up and down separately for certain periods of time.

GSR As A Rebalancing Tool

We know that rebalancing involves selling the overpriced and buying the underpriced to balance our portfolio back to its asset class allocation. Likewise, we can make use of GSR as a rebalancing tool for gold and silver within the commodities portion. The tricky part is what would be the “magic number”, which unfortunately there isn’t any.

If you have some trading background, you could employ technical charting such as trends and signals. However, for the not-so technically inclined (like myself), you could use a moving annual average of past GSRs, something like how I would do it for the indices in my 10-30 Rule in my ebook⁵.

Let’s say I want to use a 3-year moving annual average, so I would take the GSR at the beginning and ending of 2016, and get an average value for that year. I repeat for the years 2017 and 2018, and then I will average these three numbers to get the final average number, and that will be my “magic GSR number” for 2019. When 2020 comes, I will get the 2019 figure and average it together with 2017’s and 2018’s, and I have another new “magic GSR number”. 

This is just one method. You can choose any number of years for your moving annual average, and/or you can choose to obtain the GSR from different points within a year instead of twice, like three times for the case of half-yearly (1 Jan, 30 Jun and 31 Dec) or five times for quarterly (1 Jan, 31 Mar, 30 Jun, 30 Sep and 31 Dec). Furthermore, instead of one number, you can have a tolerance range (e.g. plus 10, minus 10).

You may be wondering, “I already have a 50-50 allocation of gold and silver in my commodities. I could just rebalance according to these fixed percentages. Do I still need GSR to guide me?”

And my answer is: it is up to you.

Cheers!

1, 3 – Goldprice. Gold/Silver. https://goldprice.org/gold-silver-ratio.html  (accessed 20 Apr 2019)

2 – Portfolio Visualizer. Annual returns correlation between GLD and SLV ETFs, 1 Jan 2007 to 31 Dec 2018. https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=GLD%2C+SLV&endDate=04%2F20%2F2019&timePeriod=4&numTradingDays=60 (accessed 20 Apr 2019)

4 – The Bedokian Portfolio, p36

5 – ibid, p119-120