Ratio Analysis: The Timeless Tool for Finding Value in Commodity Markets

Why Dollar Prices Lie — and Ratios Tell the Truth

When gold trades at $3,000 per ounce, is it expensive or cheap? The honest answer is: you cannot tell from the dollar price alone. A dollar today buys far less than a dollar in 2000, and far less still than a dollar in 1971 when the gold standard ended. Comparing today's price to a historical price without adjusting for monetary expansion is like measuring a room in feet and then switching to metres halfway through.

Ratio analysis solves this problem elegantly. By dividing the price of one commodity by the price of another — both denominated in the same currency — the currency itself cancels out. What remains is the relative value of one real asset against another, expressed in a unit that has remained stable across centuries of monetary history.

The Gold/Silver Ratio: A Case Study in Longevity

The gold-to-silver ratio — the number of ounces of silver required to purchase one ounce of gold — is perhaps the oldest financial ratio still actively tracked. Roman monetary law fixed it at 12:1. During the classical gold standard era it hovered near 15:1. In the modern era it has ranged from a low of roughly 14:1 (1980) to a high above 120:1 (March 2020).

That 120:1 reading in March 2020 was a generational signal. Silver was, by this measure, the cheapest it had been relative to gold in recorded history. Investors who recognised the extreme and rotated from gold into silver captured a 150% move in silver over the following 12 months — without needing to predict inflation, interest rates, or Federal Reserve policy.

How to Read a Ratio

A ratio above its long-run average tells you the numerator commodity is expensive relative to the denominator — or equivalently, the denominator is cheap. A ratio below its average tells you the opposite. The further the ratio sits from its historical mean, the stronger the reversion signal.

This is not a timing tool in the short-term sense. Ratios can remain at extremes for months. But over a 12–36 month horizon, commodity ratios have demonstrated a persistent tendency to mean-revert — driven by the fundamental economics of supply, demand, and substitution. When silver becomes cheap enough relative to gold, industrial users substitute silver where they can, investors rotate, and miners redirect capital. The ratio corrects.

Beyond Gold and Silver

The same logic applies across the commodity complex. The Gold/Platinum ratio has historically averaged near 1:1 — one ounce of gold for one ounce of platinum — reflecting platinum's comparable rarity and greater industrial utility. When the ratio rises significantly above 1:1, as it has in recent years, platinum is signalling deep undervaluation relative to gold on a historical basis.

The Gold/Oil ratio measures how many barrels of crude oil one ounce of gold can purchase. When this ratio is high, energy is cheap relative to monetary metals — a condition that has historically preceded strong oil recoveries. When it is low, energy is expensive and gold is relatively undervalued.

The Copper/Gold ratio has a different character: it is widely used as a leading indicator of global economic activity. Copper is the industrial metal most sensitive to construction and manufacturing demand. When copper rises relative to gold, the market is pricing in economic expansion. When gold rises relative to copper, risk aversion and economic contraction are being priced in.

Ratios as a Portfolio Framework

At Walmer Family Fund, we use ratio analysis as the first filter in our commodity investment process. Before we consider any macro factor or technical chart, we ask: where does this commodity sit relative to its peers on a ratio basis? If a commodity is at a multi-decade ratio extreme, it earns a place on our watchlist regardless of what the dollar price chart looks like.

This approach keeps us focused on genuine value rather than momentum. It prevents us from buying commodities that are merely rising in dollar terms while becoming more expensive relative to alternatives. And it gives us a historically grounded framework for position sizing — the more extreme the ratio, the larger the potential allocation.

Ratio analysis does not tell you when to buy. That is the job of Pillar II (macroeconomic conditions) and Pillar III (technical analysis). But it tells you what to buy — and that is the most important question of all.