Trading off the Gold-Silver Ratio May 19, 2022
Updated and republished on 19 May 2022
Strategise gold and silver investments to your advantage.
- The gold-silver ratio is the measure of current gold price divided by current silver price, which shows how much more expensive gold is in comparison to silver.
- When the ratio is abnormal, we can read the trends to decide if we should enter into a long trade or short our gold and silver stocks.
- When the ratio is normal, we can study recent trends to choose whether to trade in these commodities or not.
- For smaller risks, investing in alternatives like gold and silver ETFs and CFDs can also be a good strategy.
Precious metals are referred to as “crisis commodities” owing to their ability to retain value even in times of economic strain – or crises such as a pandemic. Since these two commodities are so valuable and often work in tandem with each other, investors and traders alike follow a measure, called the ‘gold-silver’ ratio, to determine the most profitable buying or selling actions.
What is the gold-silver ratio?
The gold-silver ratio can be determined by dividing the current gold price by the current silver price. In other words, it is the proportional relationship between the prices of gold and silver – that is, how many ounces of silver can be bought with one ounce of gold. Of course, gold is always more expensive than silver, but the ratio helps us determine exactly how much more expensive it is. As we can see from the table below, the gold-silver ratio usually ranges between 50 to 80.
Figure 1. Gold-silver ratio over the past 30 years
But then… What happens when the ratio is abnormal?
These sharp points, as circled in red in the table, are known as historic highs or historic lows. As the name suggests, this is because the gold-silver ratio is usually stable, and extremes are only reached in times of economic crisis, such as recessions, when people begin to panic buy safer commodities like gold. In such cases, a historical high is reached, when gold is much more expensive compared to silver.
Historical lows are the opposite: it means gold is not as expensive compared to silver (but it will still be more expensive in absolute terms!)
These historical trends signal buyers to undertake some investment actions, since we assume that the ratio will stabilize again. However, these trading actions are not based solely on the ratio itself, but also the individual price trends of gold and silver. In the table below are usual buying actions: ‘long’ indicates that you might want to hold onto the commodities to build up your portfolio over time.
|Gold/Silver Ratio||Gold and Silver Price||Investing Signal|
|Historic high||Upward||Long Silver||Historic high||Downward||Short Gold|
|Historic low||Upward||Long Gold|
|Historic low||Downward||Short Silver|
The ratio is rarely abnormal. What if I want to start investing now?
The ratio fluctuates on a daily basis too, independent of the free market. This was not always the case, since the old system of gold standard currency meant governments would fix the ratio. However, now we can still study the ratio and individual trends to gain an understanding of what would be the best decision for us.
In the same way we determined the actions for the historic trends, we can do so for smaller trends by reducing the timeframe to a few months – ideally you should observe the past four to six months. Once you know the current ratio as well as individual gold and silver prices, go ahead and use the following chart to trade.
|Gold/Silver Ratio||Gold and Silver Price||Trading Signal|
|Uptrend||Uptrend||Buy Gold||Uptrend||Downtrend||Sell Silver|
Not sure how to adjust the timeframe to view trends? You can click here to read a guide on how to invest using ChartView on the POEMS platform.
I’m still unsure about investing… What do I do?
It’s perfectly normal to be skeptical about trading or investing, even if you are a seasoned trader. The markets for gold and silver are prone to volatility, and they fluctuate depending on demand. Moreover, relying on the ratio to stabilisze during historic trends is considered risky for some;: there is a chance that the ratio might just keep expanding or contracting, and then the investor is stuck.
The good news is that safer alternatives do exist! A Contract for Difference (CFD) allows you to exchange only the difference in value of a product and not the underlying asset itself. You can trade at various index points, with Gold USD1 CFD and USD100 CFD, or Silver US50 CFDs on POEMS.
Investors also prefer to play the gold-silver ratio and trade on it using an Exchange-Traded Fund or ETF. An ETF is a basket of various securities that trades just like a stock does. One can simply invest or trade in gold ETFs or silver ETFs instead, at the same trends mentioned in the above table. Some common gold ETFs are SPDR Gold Shares and SPDR Gold Mini-Shares, which trade on the New York Stock Exchange (NYSE), Singapore Exchange (SGX) and Hong Kong Exchange (HKEX).
You can trade on all these exchanges using the POEMS platform, as well as invest in other gold ETFs. You can find more information about gold products here. If you don’t have a POEMS account already, you can also open a free account to start trading now!
Too much to remember? Here is a handy infographic to help you on your gold-silver investment journey.
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About the author
Alefiya is an intern with the POEMS team. She is currently completing her undergraduate studies in Psychology and English Literature at NUS.