Mathematically speaking, the ratio will rise when either 1) the XAU rises faster than the price of gold (on a percentage basis) or 2) the price of gold falls faster (on a percentage basis) than the XAU. And the ratio will fall when the exact opposite happens.
So what does the XAU:Gold ratio actually mean? It tells us, relatively speaking, if gold miners are undervalued, overvalued, or adequately valued based on the price of the underlying commodity (gold). As the XAU:Gold ratio falls, miners become more undervalued relative to gold, and vice versa.
Turning to the chart, we see that the ratio more or less oscillated between 0.175 and 0.350 from 1983 to 2008 - a span of 25 years. When the ratio dropped below 0.20, it was an excellent time to buy miners and when the ratio rose above 0.30, it was time to sell. For 25 years the XAU:Gold would inevitably revert back to the mean trading range. But something happened in 2009 that threw the ratio out of whack. It pierced the downside of the prior long-term trading range and never looked back. Each year for the past five years, the ratio dropped lower and lower still, all the while making miners ever more undervalued relative to gold. In fact, the new all-time lows in set in June 2014 meant that mining stocks were the most undervalued to gold in the last 30 years, or as long as the XAU has been in existence. If you ever wanted to buy mining shares, you're likely not going to get a better chance than right now. As you'll see in a moment, the XAU:Gold chart is starting to turn higher so this opportunity won't last for long.
As I've shown here, here, and here, there have been bullish non-confirmations all over the place recently in the precious metals sector. While gold, silver, and mining stocks have languished of late, their internal indicators have been flashing signs of big underlying strength. The XAU:Gold ratio is no different. As it continued to make new all time lows in 2012, 2013, and yet again in 2014, its MACD, Stochastics, and RSI (relative strength index) were stubbornly not confirming. Surprisingly, the MACD bottomed way back in 2009 and has been making its way higher ever since. And in a recent bullish development, there has been a positive MACD crossover just in the last couple of months. Add to that the fact that RSI is coming off the most oversold levels ever and Stochastics screaming higher, you have the recipe for a prolonged move upward.
The last thing I'll point out is that the 15-month EMA (exponential moving average) had acted as stout resistance for the past five years as noted by the green arrows. Every rally up to the line was sold (and sold hard). What's interesting, however, is that in just the last month, the ratio has pierced above the line. We'll need some time to go by to see if resistance has now turned into support, but this is yet another clue that a major trend change is underway.