Simply put, the gold-silver ratio is the price of gold divided by the price of silver. In other words, it is the amount of silver that is equivalent to one ounce of gold. This ratio has historical significance, having been used as a tool to maintain the stability of currency. This dates as far back as during the Roman empire, when the ratio was set as 12:1. In the 18th Century, the U.S. set this ratio as 15:1 with the Coinage Act of 1792.
These days, the ratio is floating, and has increased from 55 to 75 since 2013 and has been trading between 65.5 and 83.5 in the last two years.
What does the ratio tell us about the metals market and beyond? Gold is often used as a currency and a safe-haven asset, while silver has more industrial uses. Silver prices are more sensitive to the economy and tend to be more volatile than gold prices. Consequently, in times of economic recovery or growth when industrial production is high and investors move away from risk-off assets, this ratio comes under pressure.
The gold-silver ratio strategy is a trading strategy that involves comparing the relative performance of gold and silver prices in order to identify potential trading opportunities.
This includes using the ratio to look for price trends and signals for these precious metals. This is summarised in the table below:
|Gold-Silver Ratio Trend||Gold and Silver Trend||Signal|
|Gold-Silver Ratio Uptrend||Gold and silver in Uptrend||Buy Gold|
|Gold-Silver Ratio Uptrend||Gold and Silver in Downtrend||Sell Silver|
|Gold-Silver Ratio Downtrend||Gold and silver in Uptrend||Buy Silver|
|Gold-Silver Ratio Downtrend||Gold and Silver in Downtrend||Sell Gold|
Using this as a guide, investors can then determine their entry points with technical analysis, as well as set into place the appropriate risk management including stops.
Another way to trade using the GSR is to treat the historic highs and lows as resistance and support lines. This is because gold and silver are correlated in certain ways, including the fact that they are both denominated in U.S. dollars. Therefore, the GSR will very rarely move beyond historical lows or highs.
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The strategy can be implemented in different ways, for instance, some traders may use the ratio as a long-term indicator of the market, while others may use it as a short-term indicator.
On the other hand, it is also important to note that, like any other strategy, the gold-silver ratio strategy is not without risks. The ratio can be affected by a wide range of factors, such as economic and political events, changes in interest rates, and fluctuations in the supply and demand for gold and silver.
In conclusion, whilst the gold-silver ratio trading strategy helps traders looking to trade metal identify potential trading opportunities, it is also important to be aware of the risks involved and to use this strategy in conjunction with other market analysis tools and strategies.
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