To understand the ratio of the prices of gold and silver, let‘s look at an example. If the price of gold were $1,000 an ounce and the price of silver $20, the ratio would be 1000/20 = 50. What 50 represents is takes 50 ounces of silver to buy one ounce of gold.
Historical ratios of gold and silver have fluctuated between 12:1 and 16:1. While gold historically has averaged 16:1, we haven‘t seen that correlation since gold took over as the standard at the end of the 19th century. President Nixon took us off the gold standard in 1971 and since then, the ratio has taken a turn in favor of gold. This is further proof that gold is valued higher than silver.
The monthly gold/silver ratio has been 44:1 to 98:1 over the past 22 years. It reached a high recently of 84.4:1 on October 17th, 2008 and fell to 66.7 in May of 2009 and has remained steady through June of 2010, where it hit 66.53. What this has shown is that gold and silver have traded together of late, both acting as a hedge against world uncertainty.
The line in the sand for the gold/silver ratio seems to be 50:1 and any time it approaches this level would be a good time to dollar-cost average into silver. 80:1 seems to be the time to be cautious, or possibly take the other side of the trade.
A trader needs to be patient and wait for these ratios to reach the levels described above if they wish to make this trade based on the ratio.