When comparing gold to silver in terms of value, the Gold-Silver Ratio is a good tool - comparing the price of an ounce of gold to silver. Over the last 10 years, GCR has swung widely between a high of 80 to a low of 40.
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| Source: Bespoke Investment Group |
Dividing the current price of gold ($1,385) by silver ($29) yields a ratio of 48. It measures the relative priciness of silver compared to gold.
The chart shows low of 40 since early 1980s. The upper end is about 80 (barring the odd spike >80 in early 1990s).
When the price line is heading up, it means GCR is widening – thus gold is relatively more expensive. When the price line moves down, it indicates silver is becoming more expensive relative to gold.
Or, when the line is rising, gold is outperforming silver, & vice versa. When the ratio hit 80 silver started to outperform, & when the ratio hit 40 gold started to outperform.
For the last 6 months, GCR has trended down from high 60s to about 48 now.
If history is a guide, this indicates silver is getting overbought versus gold.
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Gold & Silver demand up
Gold's recent rise is believed to be due to Chinese demand for the precious metal amid uncertainties over the economy & inflation fears. Following the Fed's QE2, investors are concerned European central bankers could similarly resort to Quantitative Easing, thus driving demand for Gold & Silver as the traditional inflation hedges.
1. Hedge against Inflation2. Alternative to US Treasuries3. Loss of faith in paper currencies4. Preparing for coming Financial Collapse
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