How to Trade the Gold-Silver Ratio

 

How to Trade the Gold-Silver Ratio

The gold-silver ratio is one of the most important concepts for both new and experienced precious metal investors to understand. At its core, the gold-silver ratio tracks the difference in value between gold and silver, the two most commonly traded precious metals. To find the gold-silver ratio, you’ll need to divide the spot price of gold per troy ounce by the spot price of silver per troy ounce.

While the gold-silver ratio can be helpful for investors looking to understand how the two precious metals perform relative to one another, it can also play an important role in certain investing strategies. In fact, trading the gold-silver ratio is an old and highly popular strategy for investing in precious metals. 

Trading the gold-silver ratio involves monitoring the GSR and switching from gold to silver – or from silver to gold – as the ratio fluctuates and hits certain values. While this is a popular way to invest in precious metals, it can be tricky to properly time the market and trade the gold-silver ratio.

Wanna learn how to trade the gold-silver ratio like a pro? On this page, we’ll walk readers through an overview of the gold-silver ratio, a basic introduction to the investing strategy called “swing trading,” and a breakdown of the pros and cons of this method of investing in gold and silver.

What is the Gold-Silver Ratio?

Before we get into how to trade the gold-silver ratio, we should take a minute to discuss how the gold-silver ratio is determined. What is the gold-silver ratio? The gold-silver ratio is a figure used to describe the difference in value between gold and silver. Most commonly, the GSR represents the number of troy ounces of silver required to equal the value of a single troy ounce of gold. 

When the spot price of gold increases by more than the price of silver, the gold-silver ratio increases, since it takes more ounces of silver to equal a single ounce of gold. Conversely, the gold-silver ratio decreases when the silver gains ground against gold, because this means it takes fewer ounces of gold to equal one ounce of gold. 

Many investors use the gold-silver ratio to determine which of the two precious metals is undervalued. A high gold-silver ratio could mean that gold is overvalued and silver is undervalued, while a low gold-silver ratio suggests that the opposite is true.

Finding Today’s Gold-Silver Ratio

Because the spot prices of gold and silver are constantly changing, the gold-silver ratio fluctuates from minute to minute. Whenever either precious metal changes in value, the gold-silver ratio is adjusted accordingly to reflect the relationship between these two markets. 

You can find the latest updated gold-silver ratio here. Hero Bullion’s gold-silver ratio page is updated 24/7 with the current gold-silver ratio, so be sure to check back to find the latest GSR.

What Does it Mean to Trade the Gold-Silver Ratio?

“Trading” the gold-silver ratio refers to a strategy in which investors swap between gold and silver based on the current gold-silver ratio. When the gold-silver ratio is high, it typically suggests that silver could be undervalued. When investors attempt to trade the gold-silver ratio, a high gold-silver ratio is considered a buy signal for silver. Conversely, a low gold-silver ratio suggests that gold could be undervalued, which is a buy signal for gold. 

Using this method, many gold-silver ratio traders “swing” between the two precious metals, buying silver when the GSR is high and switching over to gold when the GSR falls. 

Trading the Gold-Silver Ratio

The most common way to trade the gold-silver ratio is likely also the simplest. Some precious metal investors use the gold-silver ratio to “swing” back and forth between the two precious metals in order to gradually increase the amount of metal they own without altering their cash position. 

Sound confusing? Let’s take a look at the basic idea behind trading the gold-silver ratio. 

Maximizing Your Stack Using the Gold-Silver Ratio

When you trade the gold-silver ratio, the goal is generally to gradually accumulate as much of each metal as you can by “swapping” when the GSR hits high and low points. 

To illustrate how this process works, let’s consider a hypothetical investor who begins with 50 troy ounces of silver.

1. The investor trades their 50 troy ounces of silver for 1 troy ounce of gold when the GSR hits 50:1. 
2. Then, the GSR jumps to 100:1. The investor trades their ounce of gold for 100 troy ounces of silver. 
3. The next month, the gold-silver ratio falls down to 25:1, so the investor trades their 100 troy ounces of silver for 4 troy ounces of gold. 

In this example, the investor never needed to add more cash to their initial investment – they simply swapped between gold and silver, maximizing their return each swap by monitoring the gold-silver ratio as it changed. When you trade metals this way, your focus isn’t necessarily on the spot price of either metal. Instead, you’re interested in the value relationship between them.

Other Methods of Trading the Gold-Silver Ratio

The most popular method of trading the gold-silver ratio involves maximizing your physical gold and silver holdings by timing your exchanges with fluctuations in the gold-silver ratio. However, some investors use the gold-silver ratio to time investments in gold and silver stocks, ETFs, and other non-physical metals.

Below, we’ll take a closer look at how trading the gold-silver ratio on the stock market may work.

ETFs, Stocks, and the Long/Short Ratio Trading

Some traders use the gold-silver ratio to maximize their profits while investing in non-physical gold and silver products like stocks, ETFs, and futures. The gold-silver ratio can give investors insight into which metal may be under or overvalued. When trading the gold-silver ratio in this way, investors usually combine a long position in one precious metal with a short position in another.

This tends to be an effective investing strategy because the gold-silver ratio functions as a seesaw. When the ratio is high, traders are more likely to sell their gold and buy silver, bringing that metal higher. As a result, a savvy investor may buy positions in silver while simultaneously shorting gold. While this obviously doesn’t always work, timing the market in this way can result in substantial profits, since you’re basically double-dipping as one metal climbs and the other falls.

On the other hand, shorting one metal while taking a long position on another can result in some pretty large losses, especially if both metals move in the opposite direction than you’re betting. As always, we recommend that investors exercise caution – and never invest more money than they’re prepared to lose.

What’s the Ideal Gold-Silver Ratio?

The modern gold-silver ratio is floating, which means that it is not pegged to any particular number. Instead, the GSR fluctuates constantly depending on demand, market dynamics, and other factors. Believe it or not, the gold-silver ratio has been regulated at several points during human history. 

During the Roman Empire, for example, the gold-silver ratio was established at precisely 12:1. Even further back in human history, the Ancient Egyptians set the gold-silver ratio at 2.5:1 under King Menes around 3,200 BCE. Even the United States once set a ratio for the value between gold and silver. The official U.S. gold-silver ratio was 15:1 from 1972 until 1834 before changing to 16:1 from 1834 until 1862. 

Since then, the gold-silver ratio has fluctuated, ranging from highs of over 100 to lows in the 30s and below. That being said, investors often want to know: What is the ideal gold-silver ratio? 

There’s no clear answer for the ideal gold-silver ratio. The average gold-silver ratio over the past 100 years has been around 40:1, but some investors believe the ideal ratio is 19:1, since gold is around 19x rarer than silver in the earth’s crust. In other words, there’s not really any clear consensus on the ideal gold-silver ratio, since the figure is prone to constant fluctuations.

Historical Gold-Silver Ratio Trends

The earliest established gold-silver ratio happened at around 3,200 BCE, under Ancient Egypt’s first king, when the ratio was set at 2.5:1. The Roman Empire established a clear gold-silver ratio at 12:1, while the United States set the ratio at 15:1 when it began its bimetallic currency standard in 1792. 

In the mid-19th century, the U.S. government amended the gold-silver ratio, changing it from 15:1 to 16:1. Toward the turn of the 20th century, the U.S. began moving away from a fixed gold-silver ratio as the bimetallic system was abandoned in favor of the gold standard. 

When silver reached its highest price ever in 1980, the gold-silver ratio dropped all the way to 15:1, the lowest point it would hit for several decades. The gold-silver ratio hit 114.77 during the COVID-19 pandemic in 2020, its highest rate ever. 

In the modern era, the gold-silver ratio fluctuates constantly, usually in the 60-100:1 range.

Should You Trade the Gold-Silver Ratio?

So, should you trade the gold-silver ratio? Using the gold-silver ratio to monitor the precious metals market certainly isn’t a bad idea, but your mileage may vary if you try to time your investments depending on the current GSR. After all, the gold-silver ratio is nothing more than an expression of the market value difference between gold and silver, so it’s prone to seemingly random fluctuations. 

Especially in recent years, the gold-silver ratio can be quite inconsistent and volatile. As a result, there’s no way to guarantee you’ll make money trading the gold-silver ratio, even if you’re able to reliably time your investments as the ratio begins to flip. 

Advantages of Trading the Gold-Silver Ratio

The biggest advantage of using the gold-silver ratio is that it allows physical metal stackers to maximize the amount of metals they’re able to secure over time. If you use the gold-silver ratio properly, you may be able to swap strategically between gold and silver as the ratio shifts. If done properly, this means you’ll slowly build your stack without adding any more cash to your baseline investment. 

Plenty of investors also make money by trading non-physical metals based on the gold-silver ratio. This method of investing takes considerably more startup cash, market knowledge, and timing, though, and there’s no guarantee that you’ll be able to etch out a solid profit. Still, the gold-silver ratio can give stock traders like yourself valuable insights into which of the two metals, gold or silver, may be undervalued. 

Downsides of Trying to Trade the Gold-Silver Ratio

The most significant downside of trying to trade the gold-silver ratio is the figure’s inconsistency. Over the past few years, the gold-silver ratio has been highly volatile. Price spikes in either direction can quickly drive the ratio higher or lower, and these fluctuations can sometimes happen with few warnings. 

Unless you’re working with a considerable amount of startup capital that you’re prepared to lose, trying to time the gold-silver ratio using gold and silver, stocks, ETFs, or futures may be a less effective and more labor-intensive strategy than simply investing in the metal you believe will perform the best. 

Final Thoughts: Trading the Gold-Silver Ratio

The gold-silver ratio is an expression of the relative value difference between silver and gold. Some physical and non-physical precious metal investors use the gold-silver ratio to determine where they put their money, which is a strategy known as trading the gold-silver ratio. 

For more information on the gold-to-silver ratio, check out Hero Bullion’s 24/7 updated gold-silver ratio chart page.

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