The demand for gold is on the rise and prices have followed suit. Throughout the past year, the price of gold has seen a momentous increase, shattering several records. Currently, the gold price per ounce is around $3,200, and multiple factors are driving that price, including market volatility, economic concerns, central bank buying sprees and an influx of gold exchange-traded funds (ETFs), according to . 

The Federal Reserve has also chosen to maintain the federal funds rate at its last few meetings due to persistent inflation and continuing economic uncertainty. The Fed rate serves as a benchmark interest rate, and as a revered precious metal, investors and central banks turn to gold in times like to help hedge against inflation and gain increased portfolio diversification. 

And, while the price of silver tends to move alongside the price of gold, it's more nuanced than that. That's why many investors look to the gold-silver ratio to gain a better understanding of where each precious metal stands and use it to inform their investment strategy. But what is the gold-silver ratio and why does it matter to precious metal investors?

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What is the gold-silver ratio?

The gold-silver ratio is a fairly simple metric that looks at the relationship between the price of gold and the price of silver.  

"It's how many ounces of silver at the current price it takes to buy one ounce of gold," says Joshua Barone, wealth manager at Savvy Advisors.

The formula is based on physical gold bullion and physical silver, though there are other gold investment options, such as gold stocks and ETFs. 

Why is the gold-silver ratio important?

The gold-silver ratio provides valuable information to investors about where to focus their attention — and where to put their funds. 

"For a precious metal investor, it's important because it kind of gives an illustration of how relatively cheap or expensive silver is compared to gold. So it helps inform our future outlook as to whether or not we should be favoring silver over gold now, or vice versa," says Chris Mancini, associate portfolio manager of the Gabelli Gold Fund.

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How do you use the gold-silver ratio as an investor?

Whether you're thinking of getting into gold investing or silver investing, or already have gold or silver investments in your portfolio, the gold-silver ratio can serve as a compass on whether to buy or sell. 

"What people think is that they view gold and silver as similar items, as precious metals," says Barone. "And so they kind of view this ratio as if it gets too big, they tend to think that then silver is undervalued, and that you should buy silver versus gold." 

Currently, the price of silver per ounce is around $32, making it a much more cost-effective option than gold and giving it a lower barrier to entry. While that may be appealing, it's important to note that silver tends to be more volatile compared to gold. Silver may also play a role in portfolio diversification, but out of the two precious metals, gold has been a stronger option. 

What does the gold-silver ratio look like now?

As the gold cost hovers around $3,200 and the price of silver clocks in at around $32, the gold-silver ratio is generally high at the moment. 

"It's just shy of a hundred to one, so 100 ounces of silver to one ounce of gold," says Barone. 

But how does that compare to other periods and gold-silver ratios that are higher or lower? 

"When the ratio is between 60-75 it is considered neutral or average, not providing much guidance as to which one (gold or silver) might do better," says William A. Stack, financial advisor and author at Stack Financial Services LLC.

The gold-silver ratio hit a high of 125 in March 2020. 

"At 125, the ratio indicated it might be better to purchase silver, and it was. Since then, the price of gold has more than doubled, but silver has nearly tripled," explains Stack. 

What will the gold-silver ratio look like in the future?

As the price of gold continues to surge, silver prices haven't quite kept up, leading to a high gold-silver ratio. Where does that lead in the future? 

"It'll probably continue to favor gold over silver," says Mancini, adding that central banks and others are likely going to increase their gold holdings. As that happens, he estimates that silver will follow, but not at the same pace as gold. 

However, Stack has a different perspective.

"This ratio will rise and fall in the short term, but mid-long term it should be expected to migrate back to neutral or the average ratio between 60-75," Stack says.

The bottom line 

The gold-silver ratio provides insight into the relationship between gold and silver prices. As the price of gold per ounce continues to rise, it can be costly to get in if you want to buy physical gold. With a high gold-silver ratio, now may be a good time to look into silver investments. 

With either of these precious metals, you can diversify your portfolio. Just be sure to understand the nuances of each type of investment, whether they're gold bars and coins, silver bars and coins or stocks or ETFs.