In trading, the gold-silver ratio shows the amount of silver needed to buy an ounce of gold at any given time. In other words, it’s the strength of the value of gold relative to that of silver currently in the markets. As two of the most precious metals in the world, these commodities have a long and closely related connection that spans centuries old.
And today, their value is still used in forex exchanges, investing, etc. If you’re a trader that’s looking for some tips and strategies that you can use for the gold-silver ratio, then you’re in luck, as that’s what we will be talking about today.
What is the Gold Silver Ratio?
Before we delve deeper, let’s talk about the gold and silver ratio. As mentioned, the gold-silver ratio refers to the amount of silver you need to buy a single gold ounce at any given time. To calculate it, you’d have to divide the price of a single ounce of silver by that of gold. Here’s an example:
$1944 Gold (per oz) ÷ $27.15 Silver (per oz) = 71.68
This means that the gold to silver ratio chart would be 71.1:1. In other words, you could buy 71 ounces of silver for the same price as a single ounce of gold. Conventional wisdom states that when the ratio notes a relatively high figure like the one above, traders should focus on buying silver for the chance of selling it off shortly for a higher price.
On the other hand, if the ratio is low, this indicates that gold is on the rise, meaning it’s a good time for traders to jump on the gold bandwagon before its price increases further. With all that said, how do you trade the gold-silver ratio? Here’s a basic principle.
How to Trade the Gold-Silver Ratio
Now that you know how it works, we’ll give you some insights on how to trade it. In a nutshell, if the ratio is outside the average, it can signal an opportunity for you to trade gold/silver with a view of profiting from it the moment the ratio returns to a normal level. However, there is no definition for normal levels. Instead, we have historical data that we can use as parameters.
Today’s ratio of above 80 is high compared to the average levels seen over the past few years. The idea here is that the value of gold is relatively high compared to the value of silver. This means that investors are currently buying a lot of gold, which is why its price is high. However, as the gold and silver ratio is highly volatile, this might change soon, for a few years at least. Although the gold-silver ratio can have volatile movements of 10+ points a month, the drastic change will only occur for a few years. Let’s give an example.
One investor notices that the ratio is high at 80 compared to the historical average. They then sell an ounce of gold for 80 ounces of silver. A few years later, the ratio went down dramatically and fell to 20, which is very low compared to the historical average. In this situation, the investor would then trade their 80 ounces of silver for four ounces of gold, effectively quadrupling their initial investment.
Repeating these steps would then build up his overall inventory of gold and silver as they trade sides according to the ratio every few years. That’s the basic principle, but you can use the gold and silver ratio on other things.
Another strategy for which you can use the gold-silver ratio is to trade exchange-traded funds. These funds are traded on the market like stocks, buying and selling them according to which move suits their strategy. For example, trading ETFs like iShares Silver Trust and SPDR Gold Shares generates a similar effect as that trading with the gold-silver ratio. However, remember that they are paper “silver” and “gold.”
Essentially they are only silver and gold on paper and are different from real gold and silver that you can hold in your hands. Trading in ETFs is similar to trading the gold-silver ratio. They use the basic principles, and the assets’ value, like the ones from iShares Silver Trust and SPDR Gold Shares, has the same value as real gold and silver metals; hence, they ETF traders rely on the gold-silver ratio to make their investments and tradings.
Trading off the gold-silver ratio can provide profits for investors, even when either of the precious metals falls in value. Precious metals investment is the go-to for many investors, after all. But even with that fact, the market value of these precious metals is volatile at best, so you still need to learn to strategize if you want to profit from trading them.