Gold or Silver? What does the G/S Ratio Say?

Gold or Silver? What does the G/S Ratio Say?

Investors and traders interested in metals often look only at precious metals and when they look at precious metals, everyone turns to gold. There are two rookie mistakes there: 1. Ignoring base metals, like copper. (for a recent article on copper, click here: 2. Ignoring silver. Depending on your motivation for trading metals, silver may be the better bet, even short term.

First off, Sliver is much more volatile, which means price swings are larger on a percentage basis and that gives the short-term trader opportunities (especially in Nadex’s limited risk binary options and spreads). Just looking at a couple of recent historical swings from peak to trough, the fall from the 1980 high to the 1985 low in gold amounted to -65.5%, but in silver it was -89.1%. The gain for the 2008 low to the 2011 high in gold was +166%, but in silver it was +448%.  Looking at the volatility indexes for each metal just in the month of May, gold’s VIX has had a 2.12 point range from high to low, while silver’s VIX has had a 7.06 point range.

Then there is the matter of the Gold Silver ratio, which sits at 79.5. Put simply, the gold-to-silver ratio is the amount of silver it takes to purchase one ounce of gold. It’s relatively easy to calculate on your own. Simply take the price of gold, divide it by the price of silver and you have the gold-to-silver ratio. Here is the calculation using current prices as I write this: $1270.10 (gold price) ÷ $15.97 (silver price) = approximately 79.5 (Gold-to-Silver Ratio). Gold or Silver? What does the G/S Ratio Say?What does that mean? Currently it takes 79.5 ounce of silver to purchase 1 ounce of gold. Traders will look at this ratio to try and corral which metal may perform better. While the G/S ration has been on an uptrend in the last 5 years, the 10 year high is 80.57 (March 2016). The 20 year high is 80.61. That means traders are likely to play a pull back to historical averages, and favor silver over gold in up markets and gold over silver in down markets.

This is not a complete strategy in and of itself, and certainly isn’t a sure thing. This should not be misconstrued as long-term investment advice, but it is import to consider the gold silver ration when making precious metal trading decision. Your limited risk trading opportunities await you at the CFTC regulated North American Derivatives Exchange.

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