Gold Silver Ratio is the best tool for creating a strategy for gold traders and investors.
You have probably heard many times about gold-silver ratio, but you might not have known about how it is being used by the market traders as buying and selling signals in the commodities trading market. The following article will shed light on how to use gold-silver ratio in commodities trading strategy.
What is Gold Silver Ratio?
The name of the ratio clearly suggests the meaning of the ratio. The gold-to-silver ratio represents a number that explains how many ounces of silver is required to purchase ‘one’ ounce of gold as per the current trade prices. Thus the gold-silver ratio mathematically explains the strength of gold in comparison to silver and this helps traders to formulate and understand the gold trading strategy. An investor can utilize the gold-to-silver ratio as an indicator to understand the movement of gold against silver thus helping them in diversifying their risks in commodities market investments and portfolio.
The gold-silver ratio is very helpful in creating a strategy for gold traders and investors. The ratio helps gold traders and investors to remain profitable and heavily invested in precious commodities at all times. The gold-silver ratio helps the gold traders and investors to understand when and how to much to hold on this asset. Holding these precious metals will help gold traders and investors in earning massive profits but understanding how much and when to hold is an important aspect of commodity trading.
The gold-silver ratio changes every day as gold and silver are traded daily in the commodity market. This ratio is most revered by market enthusiasts who wish to accumulate more quantities of gold rather increasing the monetary value of these commodities. Confused?
Read on to understand the working of the ratio.
How does the gold-silver ratio works?
Now that you have understood gold-to-silver ratio let us now understand how the ratio works and helps in creating strategies for gold traders and investors. The main motive of using this ratio is to understand how much quantity of gold or silver is to be accumulated and when that quantity needs to be sold off. This ratio is used for learning the skill of accumulating greater quantities of these precious metals rather than increasing the monetary value of the commodity. Here is the basic understanding of the gold-silver ratio.
Thus the gold-to-silver ratio helps to formulate a gold trading strategy to understand holding patterns of these precious commodities and when to switch their holdings to perform a profitable transaction. Let us understand holding patterns with an example:
We all by now know that this ratio is used to do a trade based on accumulating higher quantities of these precious metals. The following example will help you in understanding when to switch holding of these precious metals:
Thus the gold-silver ratio helps the long-term investors to take definitive decisions of the commodities market. This ratio helps in formulating the gold trading strategies for gold traders and investors to effectively strategize while buying the precious metal. Thus the gold-to-silver ratio will help you in:
- Determining the strongest metal trending and when to buy it or sell it
- Identifying Silver and gold trading strategies and opportunities
- Defining the trade size
- Measures to stop losses and ripe profits
The following table will help you understand a general trend of trading gold and silver using the gold-silver ratio:
|Trend of Gold Silver Ratio||Trend of Gold and Silver||Indication|
|The ratio shows an Uptrend||Gold and silver shows an Uptrend||It’s time to buy Gold|
|The ratio shows an Uptrend||Gold and silver shows Downtrend||It’s time to sell Silver|
|The ratio shows Downtrend||Gold and silver shows an Uptrend||It’s time to buy Silver|
|The ratio shows Downtrend||Gold and silver shows Downtrend||It’s time to sell Gold|
The gold-silver ratio is a relative trade between the metals. A general understanding is that when the ratio reaches its historic high many gold trading strategies suggest selling of gold for silver but while the gold-silver ratio reaches low gold is perceived as cheaper as compared to silver. The other important aspect of understanding the gold-to-silver ratio is knowing the drawbacks of this ratio. The drawbacks of this ratio are as under:
- So when gold is expensive and silver is inexpensive many traders hold the precious metal gold which a contradiction to the ratio as the real idea of the gold-silver ratio is to sell off the expensive metal against inexpensive and hover with it till the ratio is back to normal and then buy a bigger quantity of gold
Thus, above are the two common and biggest mistakes in gold trading strategy done by investors. Here are few top tips that every investor must take into consideration in gold to silver ratio trading:
- A gold-silver ratio is an indicator of investors’ appetite. If the ratio is showing an upward trend then it possibly indicates that investors are less inclined to risk while if the gold-silver ratio shows a downward trend then it possibly indicates that investors have a higher risk appetite.
- A gold-silver ratio is a tool that is used to indicate the health of the world economy. If the ratio is swinging towards a downward trend or is at a low point then it indicates that the world economy blooming and is in its growth phase while if the ratio shows an upward trend then it indicates bad health of world economy.
- One of the most useful tips of gold – to – silver ratio trading is that if you use the ratio along with the individual metal prices and predict the changing trends then possibly you would determine the stronger trend prediction of gold-silver ratio trading.
- Whenever the gold-silver ratio is at its historical highs or historical lows then the best way is to wait as at these extreme points as there is a risk for a reversal.
- Follow a practice of understanding the movement of individual metal prices along with the movement of the ratio.
- Read all the updates and monitor all the ratio changes over short-run or long run and individual metal price movements before trading the ratio.
Gold-Silver Ratio Trading Alternatives
Gold-Silver Ratio trading can be utilized to formulate numerous gold trading strategies with different alternatives as under:
It involves a simple purchase transaction. The purchase is of either gold or silver contracts. Leveraging the contracts can be both the advantage and the disadvantages of this trading. futures trading is a very risky proposition for those who have no experience or knowledge in this field.
Exchange Traded Funds (ETFs)
ETFs is the simplest way of trading with the gold-silver ratio. As the ratio rises investors buy silver; as the ratio falls investors sell silver to buy gold. Trading in ETFs keeps investors away from speculating the “extreme” ratio levels.
Options strategies involve puts and calls. When the gold to silver ratio is high the investors make a purchase of puts on gold i.e. selling of gold and calls on silver and viz-a-viz when the ratio is low.
Pools accounts are large, private holdings of precious metals that are sold in a variety of denominations to investors.
Gold and Silver Bullion and Coins
This trade involves buying gold and silver bullion and coins in the physical aspect. Many of the trade specialists do not recommend this trade as it includes trading with physical gold.
There are so many ways in which gold-to-silver ratio trading can be done and that many strategies for gold traders and investors can be formulated but what’s most important is knowing one’s risk appetite. So first understand your trading personality and risk appetite and then plunge into the sea of gold-silver ratio trading. Thus you can do gold to silver ratio trading in any way but note that each of them has their own risks and rewards.