When digging deeper into issues relating to trading precious metals you may come across the idea of using gold to silver ratios as part of decision-making.
This brief article explores what this means both in terms of definition and potential implications for traders.
What is the Gold-Silver Ratio?
The direction and degree of movement in the two key precious metals occurs “in synch” i.e. when one moves so does the other similarly. However, the exact rate of this movement over a period may differ, and it is this that attracts the attention of some precious metal investors.
The gold-silver ratio is simply the amount of silver it takes to purchase one ounce of gold.
If the spot price of gold is $1403 with silver at $15.3, the approximate ratio is 92:1.
When considering this information, the respective prices of each are considered irrelevant; it is this ratio that attracts some attention for the most avid of precious metals investors. Rather, it is a potential indicator as to which precious metal is more likely to yield a greater return if taking a “long” position (or vice versa).
Historically throughout the 20th Century, this ratio has been reported at an average of 47:1, so theoretically the current ratio is low for silver value than traditionally has been the case.
There does not appear to be a strict defined range what is normal and what is high or low, but some consensus internationally suggests that between 40-70 could be a normal range, and outside of this can be considered either high or low, and so may correct according to a movement back within the ‘normal’ range.
Theoretically, the implications of this are when making a choice to trade either gold or silver, if this ratio is high then it would suggest that silver may have more positive % move potential, and if low, then gold may be more worthy of your choice.
It is also noteworthy that generally, when one explores research on this topic, that it is for possible use by those taking longer term positions (i.e. using daily/weekly charts for decision making) rather than short-term price fluctuations you may see on an intraday chart.
The reality in your trading
As previously stated, this seems to be something of interest to the major “gold bugs”, and there is widespread variance in thinking on this topic. The inference by some is that fluctuations in the ratio may help in the choice as to whether long term gold or silver.
So, as with much that is “out there” this may in part inform trading decision making at any level, the onus as to whether this has relevance in your practical trading of course rests with you.
Our aim of this article was to put the concept out there so you can do your own research and make the choice as to relevance for you and as importantly how you may integrate it with other factors you use in your entry and exit decisions.
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The articles are from GO Markets analysts based on their independent analysis. Views expressed are of the their own and of a ‘general’ nature. Advice (if any) are not based on the readers personal objectives, financial situation or needs. Readers should therefore consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice