The gold-silver ratio shows how many troy ounces of silver are equivalent in price to one troy ounce of gold, based on selected price quotes. It can decrease even when the price of silver is unchanged or when the prices of both metals are falling. Therefore, relative outperformance doesn't necessarily mean a profit in dollars.

The Basic Formula

The gold-silver ratio is the result of a simple division of one metal's price by the other's.

Formula: R = Price of Gold / Price of Silver

To be accurate, the calculation requires using the same units for both metal prices—for example, in U.S. dollars (USD) per troy ounce CME Group.

This compares quoted metal prices; it does not tell you how many silver coins a dealer will exchange for a gold coin.

How to Compare Prices Correctly

For a valid comparison, you need to specify the sources, currency, weight basis, and the time of the price quotes. Different pricing times can affect the result; a daily calculation should not be presented as a simultaneous market snapshot.

For example, the benchmark prices from the London Bullion Market Association (LBMA) are set at different auctions: for gold at 10:30 and 15:00, and for silver at 12:00 London time LBMA. Even within a single day, these prices are not fully synchronized. Therefore, for a daily calculation, you must specify which of the two gold auctions was used.

LBMA benchmarks refer to metal delivered in London. The prices displayed on LBMA's website are delayed and are not the retail prices you would pay a dealer for a particular coin or bar LBMA.

A Falling Ratio Does Not Guarantee a Profit

A common mistake is to assume that a drop in the gold-silver ratio automatically means a rise in the price of silver. This is not the case. The indicator can fall even when both metals are getting cheaper.

The following worked example uses hypothetical prices, not market quotes or forecasts.

• Initial situation: Gold is priced at 4000 USD per ounce, and silver at 50 USD. The ratio (R) = 4000 / 50 = 80.

Now, let's look at two alternative scenarios relative to the initial situation, where the ratio falls to 60:

1. Gold's price falls, silver's price remains stable. Gold drops to 3000 USD, while silver stays at 50 USD. The new ratio = 3000 / 50 = 60. Silver has not gained in dollars; it has simply held up better than gold in this scenario.
2. The prices of both metals fall. Gold drops to 2400 USD, and silver to 40 USD. The new ratio = 2400 / 40 = 60. Although the ratio has decreased, the silver owner has lost 20% of their asset's value (the price fell from 50 to 40 USD).

This example shows that relative performance is not the same as absolute profit in dollars. Silver can "outperform" gold, yet both assets can be losing value.

An Assumed Ratio Does Not Determine Silver's Price

Some investors try to forecast the price of silver based on an expected future ratio. However, the ratio value by itself is not enough to determine the price. You also need the price of gold.

From the formula R = G / S, it follows that the price of silver S = G / R.

For this educational comparison, let's set R = 80 and calculate S for three hypothetical gold prices. The results below were calculated by our editorial team using the formula and are not taken from a forecast.

Assumptions, not market observations. S = G / R, calculated by the editors. No target date or probability is assigned to a cell. Ratio definition: CME Group; no historical figure or restricted price series is reproduced. Data CSV. Each cell follows from the stated assumptions; it does not assign a probability or a date to that outcome.

Costs of Buying Physical Metal

The calculations above compared the prices of the metal itself, not finished products. When you buy or sell physical coins and bars, additional costs come into play that are not accounted for in this ratio.

These include:

• Dealer's markup (premium): The amount added to the price of a product over a chosen market benchmark for a comparable amount of metal.
• Spread: The difference between the price at which a dealer sells you the metal and the price at which they are willing to buy it back.
• Storage and insurance costs: These may apply depending on the storage method, including at home.

The financial outcome of a specific transaction depends on the actual purchase price, the subsequent sale price, and all associated costs. CFTC/FINRA recommend finding out the buy-back price and costs in advance. If the calculation is based on actual purchase and buy-back prices, the markup and spread already included in them should not be added a second time. The change in the ratio itself does not indicate whether these costs have been recouped.

Final Investor Checklist

Before drawing conclusions from the gold-silver ratio, ask yourself:

• Prices: What specific prices am I comparing? Do the currency and weight units match, and how closely aligned are the quote times?
• Scenario: What price change scenario am I considering? What happens to the price of each metal in dollars under this scenario?
• Costs: Have I accounted for the actual purchase and buy-back prices, as well as separate expenses, without double-counting the markups already included in the price?
• Conclusion: Do I understand that the ratio is an indicator of relative value, not a guarantee of absolute profit?

In the cited CME Group analysis, the author describes silver as typically more volatile than gold. This is a historical generalization, not a promise of future returns. The ratio shows the relative price of the metals but does not guarantee a return to historical averages. This article is for information only and does not constitute personalized investment advice.