The gold silver ratio is simply the gold price divided by the silver price, expressing how many ounces of silver one ounce of gold will buy. Its interpretation is more contested than its calculation.
The ratio was once fixed by law
Under bimetallic monetary systems, governments defined an official exchange rate between gold and silver coinage in order to keep both circulating at stated values.
Those fixed ratios worked only while the market ratio stayed close to the official one, and they broke down repeatedly when new discoveries changed the relative supply of either metal.
The historical figures often quoted as a natural level are records of those legal settings rather than measurements of what the market would have produced on its own.
The market ratio has trended for a long time
Since silver was demonetised across most of the world, the ratio has moved to substantially higher levels and has stayed there.
The reason is a change in what each metal is for. Gold retained a monetary role and silver became predominantly an industrial input with a smaller investment following.
A ratio calculated across that transition is comparing two different regimes, which is why long historical averages are of limited use as a target.
Traders use it as a relative measure
Because both metals respond to some of the same forces, the ratio strips out the shared component and highlights how they are performing against each other.
A rising ratio indicates silver is lagging, which typically occurs when investment demand is driving gold while industrial conditions are weak.
A falling ratio indicates silver is outperforming, which has historically coincided with the later stages of strong precious metal markets and with industrial recovery.
Switching between metals is the practical application
Some holders use extremes in the ratio to convert one metal into the other, aiming to accumulate ounces rather than to time the market in currency terms.
Each switch involves two transactions, and the dealing spreads on both sides consume part of any advantage, particularly in physical form.
The approach also assumes the ratio will revert, which it has often done and is under no obligation to do.
The ratio is an observation, not a rule
Nothing anchors the two prices to each other, since they are set by different balances of supply and demand with only partial overlap.
Periods when the ratio stayed at unusual levels for years have caught out holders who treated a wide reading as a signal that a reversal was imminent.
Read as a description of relative conditions rather than as a prediction, it summarises the difference between monetary and industrial demand more compactly than most measures.