Live Metal Prices / oz
Gold: 1312.94 USD
Silver: 15.40 USD
Platinum: 847.50 USD
Palladium: 1519.00 USD
Rhodium: 3300.00 USD

What is the Gold / Silver Price Ratio?

Outside of the price of money, perhaps the two most watched prices are the price of gold and the price of silver.  The next figure has a look at the two prices since 1976.  The red line, aligned with the left y-axis, is the price of gold.  The black line, aligned with the right y-axis, is the price of silver.  The gray bars represent periods of global recession.

Notice anything interesting?  A couple of things instantly come to mind. 

First, the difference between the price of gold and the price of silver – often called the gold/silver price ratio has changed meaningfully in recent years.

Second, the ratio between the two is not consistent during recessions.  The price movements are sometimes similar in direction, but not consistently.

A discussion of these two phenomenon follows.

First, on the price of gold to the price of silver.  The following chart has the recent historical experience.  The most recent value, at 85, is close to its all-time high of 101 reached on February 25, 2001.

What is behind the recent stronger performance of gold compared to silver?

At least three factors are at play here (there are many more than three things that affect the prices of gold and silver, but for simplicity’s sake, let’s limit it to three). 

First, the demand for gold and the demand for silver stem from different uses.  For example, central banks tend to use gold as a store of value more so than silver.  This demand affects the price of gold, and by having relatively little effect on the price of silver, indirectly affects the gold to silver price ratio. 

Second, gold tends to be a stronger hedge against inflation than silver.  This means that when investors get nervous about rising prices, they almost always turn to gold instead of silver. 

Third, supply of the precious metals is a factor in the prices of the two metals.  Gold and silver are generally not produced in the same countries or by the same companies.  When supply grows slower, as it has for gold, it puts upward pressure on the price of gold.  A similar story holds when silver production is constrained.

The Recession Picture

The second observation that came to mind was the performance of the gold to silver ratio running up to and during recessions.

The next graph has a zoomed view of the gold to silver price ratio for the past three recessions (marked by the gray bars). 

Interestingly, the ratio of the two precious metals increased sharply during the early 1990s and early 2000s recessions. 

Curiously, the ratio between the two dropped during the first quarter and last quarter of the 2008/2009 recession, and then increased sharply during the middle of the recession. 

The unpredictability of the ratio suggests that there is room for smart investors to do well during all stages of the business cycle.