Investing in precious metals such as gold and silver may bring vast opportunities. But to obtain those opportunities, traders must have enough knowledge to pursue them.
- Gold is known as the natural insurance for safeguarding the wealth in the course of inflation or any crisis arises.
- On the other hand, silver may function as an industrial metal hybrid that is also a precious metal and rises along with the gold, and the industrial output sky-rocketed. However, there is another way to generate profit from the correlated value of gold and silver. In the coming section, we’ll discuss the gold-silver (GS) ratio.
If you are interested in catching the big moves that have been made by gold and silver, the following section is for you. Here we will see the complete GS ratio trading guide, including buy and sell methods.
What is the gold-silver ratio?
Differentiating the amount of silver in purchasing the amount of gold is known as the gold-silver ratio. For instance, if it needs 70 ounces of silver to buy a single ounce of gold, it implies that the GS ratio is 70. Knowing the prices of gold and silver separately is significant in comparing. Also, monitoring the price changes of both metals may help add up a different magnitude to your analysis. If the gold’s value increases rapidly, the ratio expands by contrasting the silver’s value. On the contrary, the ratio decreases if the silver’s value speedily increases than the gold’s value.
How to trade using the gold silver ratio in trading strategy?
When the ratio goes over the average, it may indicate the trading opportunity of gold or silver and make a profit while it lowers down to its normal levels. However, there is no existing defined normal level, yet some parameter portrayals are available from the historical data that the investors may exploit.
The concept is that a higher ratio implies that the gold’s value is expensive compared to silver. Also when the ratio is lower, it implies the value of the gold is less expensive, implying that investors are inclined to purchase gold at the lower ratio and purchase silver if the ratio is high.
Even if the ratio may encounter volatile movements of 10+ points in a month, it inclines to take place the oppressive swings from the highs to the lows throughout the longer time frames. In recent decades, the GS ratio has been hardly more than 80 or under 50. Hence, while the trend can be starting to reverse, these levels are potential turning points.
If the ratio is trending, and gold and silver prices are trending, then the trading signal.
| Ratio | Signal |
| GS ratio is uptrend | Buy gold |
| GS ratio is uptrend | Sell silver |
| GS ratio is downtrend | Buy silver |
| GS ratio is downtrend | Sell gold |
A short-term trading strategy
This strategy has developed based on the market’s price action context. In this trading method, we are going to utilize the GS ratio’s upward movement to buy-sell in gold and silver.
- When the GS ratio is in an uptrend and the GS price is also moving higher it indicates a buy signal for gold.
- When the GS ratio is in an uptrend but the GS price is moving lower it indicates a sell signal for silver.
Bullish trade scenario
Entry
Look for a sell trade in silver when the ratio is an uptrend. However, the gold and silver price moves downside against the ratio.
Stop-loss
Place the stop loss order below the last swing level with at least 5-10 pips buffer.
Take profit
Take the profit when the trade achieves at least a 1:3 risk/reward ratio.
Bearish trade scenario
Entry
Look for a sell trade in silver, when the ratio is in an uptrend. However, the gold and silver price is moving downside which is against the ratio.
Stop-loss
Place the stop-loss order above the last swing level with at least 5-10 pips buffer.
Take profit
Take the profit when the trade achieves at least a 1:3 risk/reward ratio.
A long-term trading strategy
The strategy has developed based on the market’s price action context. In this trading method, we are going to utilize the GS’s downward movement to buy-sell in silver and gold.
- When the GS ratio is in a downtrend but the gold-silver price is moving higher it indicates a buy signal for silver.
- When the GS ratio is in a downtrend and the gold-silver price is also moving lower it indicates a sell signal for gold.
Bullish trade scenario
Entry
Look for a buy trade in silver, when the gold-silver ratio is in a downtrend. However, the gold and silver price is moving upside which is against the gold-silver ratio.
Stop-loss
Place the stop loss order below the last swing level with at least 10-15 pips buffer.
Take profit
Take the profit when the trade achieves at least a 1:3 risk/reward ratio.
Bearish trade scenario
Entry
Look for a sell trade in gold when the gold-silver ratio is in a downtrend. Besides, the gold and silver price is moving downside by following the gold-silver ratio.
Stop-loss
Place the stop-loss order above the last swing level with at least 10-15 pips buffer.
Take profit
Take the profit when the trade achieves at least a 1:3 risk/reward ratio.
Pros & cons
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Final thoughts
Regardless of the price falling of the gold and silver, trading off the two metal’s ratios may bring about profits for the investors. To find out the investment opportunities, the investors require understanding the price relation between gold and silver regardless of the market price of these two precious metals.
When investors can measure the correlated value of gold and silver, they will also find out the best-suited trading strategies. It will also be the best match to control the risks associated with your profile and open up massive profit potential.
