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Strategies for Trading the Gold-Silver Ratio

 21 Jun 2019

The gold-silver ratio is commonly used to obtain helpful insights regarding the possible movements of Gold and Silver. The stock traders are often on the lookout for gold-silver ratio in order to determine the buy and sell signals of the two precious metals in the current market. That being said, it is important for investors and traders to know that the gold-silver ratio can be of great help in improving your current commodity trading strategies. Before we discuss the benefits and strategies of Gold-Silver ratio trading, let’s have a look at the meaning of this ratio.

What is the Gold-Silver

To put in the simplest terms, gold-silver ratio is nothing but the total number of silver ounces a trader needs to sell in order to be able to gain one ounce of gold at the current market rates. For instance, when the price of the gold is equal to $1000 per ounce whereas the price of silver is trading at &16.65 per ounce, you can expect the gold-silver ratio to be approximately 60.

  • As per the surveys and reports, the gold-silver ratio has mostly been equivalent to 60 from the year 2001 to 2017. During this period, the maximum gold-silver ratio reached 80 whereas the lowest ratio was 40.
  • The increase in the gold-silver ratio is mostly observed during the economic depression period. When gold outperforms silver, the ratio increases. This means the traders need more ounces of silver to get one ounce of gold.
  • It was during 1991 when the gold to silver ratio peaked at 100 (probably the highest ratio). It happened due to the dropped prices of silver.
The Working of the Gold-Silver Ratio

In 1991, the silver price was trading at an extremely low cost due to which the prices of the gold increased and the gold to silver ratio reached to its maximum number. The similar crisis occurred during 2008 when the prices of gold were increasing by leaps and bounds whereas the silver wasn’t performing well in the market. Here’s how gold to silver ratio works:

  • When the prices of gold in the market increase faster than that of silver, the gold to silver ratio increases.
  • The gold-silver ratio drops when silver outperforms gold in the market and the price of the former increases faster than gold.
  • The ratio also decreases if the price of the gold drops faster than that of the silver.
  • On the contrary, the gold-silver ratio increases when the rate of silver decreases faster than that of gold.
How to Trade the Gold-Silver Ratios?

The traders can take advantage of gold-silver ratio trading. Here we have come up with two major strategies that can help you on trading gold-silver ratio. Read on:

You can Use Gold-Silver Ratio to Discover the Metal with the Strongest Trend

The Gold-silver ratio is mainly used to determine which metal is likely to perform better than the other in the market. The traders who are planning to invest in gold or silver metals can use this ratio to find the prices of which metal can take a leap in the future and make their trade accordingly. Here are some major steps a trader can use to find the gold-silver ratio:

  1. In order to find the current trend on gold to silver ratio, add a trend line to the ratio table. You will easily get to see the gold to silver ratio through GillBro app Chart. Type “Gold/Silver in the search bar and the gold-silver ratio chart will appear.
  2. Do not forget to find out the trend on both the gold and silver individually.
  3. Utilize price action as well as technical indicators to find out the trading opportunities.
  4. Discover the trade size that goes well with the account size. Once done, set “take profits” and “stop losses” before processing the trade.

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Trade the Highs and Lows of the Gold to Silver Ratio

You may come across times when the gold-silver ratio reaches historic extremes. There can be either high historic extreme i.e. when the prices of gold increase extremely faster than the silver or low historic extreme i.e. when the price of silver increases much faster than gold. It is worth to note that the precious metals are correlated to each other, though they have different attributes. That being said, the extreme high cannot go beyond 80 and 100 and the extreme low cannot go below 60 and 40.

Gold and silver reaching an extreme level is the rare incidence. It only happens when there is an economic crisis in the country. But, when it happens, the traders get good opportunities. It is important for the traders to manage the risk as the gold to silver ratios has broken the historical extremes before and it can happen in the future too.

Also Read: Know How To Start Gold Trading Online

Also Read: Know How To Start Silver Trading Online

 

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