To be successful at trading precious metals, one needs to know all the markets’ ins and outs. Silver is an often-overlooked tool in this regard. Particularly when it comes to the gold-silver ratio, it can be a potent tool.
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Gold And Silver Are Vital Metals
When it comes to trading precious metals, there are different options to explore. Most traders stick with gold, as it is the most expensive metal. It also has a solid reputation for being a store-of-value and can even note a price gain over time. Silver, on the other hand, is considered a more accessible metal to trade and equally a store-of-value.
It is not odd to figure out traders have created their own “metric” to keep tabs on both markets. Known as the gold-silver ratio, it depicts the balance between these two precious metals. One will often need dozens of ounces of silver to reach the value of one ounce of gold. Depending on how this ratio evolves, it may be prudent to buy either metal or none at all.
How Does The Gold-Silver Ratio Work?
Knowing there is a gold-silver ratio is only one aspect of the equation. Figuring out how it works and can be used to one’s advantage is an entirely different ball game. The gold-silver ratio is influenced by many factors, including economic distress and political uncertainty.
There are four different scenarios to consider:
- Gold rises faster than silver: the ratio increases
- Silver decreases faster than gold: the ratio will increase
- Gold decreases faster than silver: the ratio will decrease
- Silver rises faster than gold: the ratio will decrease
Given the market performance of both precious metals, this metric will always favor gold. However, the “peak” times may be behind us for some time to come. At its peak, the gold-silver ratio hit 121, as silver’s price kept declining.
The lowest levels recorded in recent decades reside around a ratio of 40. Currently, the metric sits at 75 and indicates it may keep decreasing in the coming weeks.
Which Metal To Buy At What Time?
Now that we know how the gold-silver ratio works, it is time to incorporate it into trading behavior. Here at Vaultoro, it is possible to trade both metals, thus taking advantage of this metric is worthwhile.
Two of the four scenarios outlined above give traders ample reason to buy gold.
- The ratio is in an uptrend, and both metals are rising in value: BUY GOLD
- The ratio is in a downtrend, and both metals are rising in value: BUY SILVER
However, there can be reasons to sell either gold or silver, depending on the prevailing market circumstances.
- The ratio is in an uptrend, but both metals decrease in value: SELL SILVER
- The ratio is in a downtrend, and both metals decrease in value: SELL GOLD
The indicators above can help traders make well-informed decisions. As is often the case, these simple guidelines may not work out 100% of the time. Any financial market can turn around on a dime. The gold-silver ratio is merely an indicator in the bigger toolset.
Analyzing Gold-Silver Ratio Turning Points
Trading any market often relies on using metrics and recognizing patterns or trends. Such a movement will occur now and then and may signal a turning point for the gold-silver ratio.
The easiest way to spot a potential turning point is when the ratio hits a high or low value. Finding those pivotal points requires a careful analysis of the chart. A historical high or low can materialize at any time, but they are often many years apart.
To analyze the chart, traders need to zoom out to monthly performance rather than a daily or weekly view. It is pertinent to have as much data as possible to analyze. Again, the ratio is merely a metric to put on a price chart. All of the heavy lifting lies solely with the trader.
It is possible to use these turning points to one’s advantage. Figuring out whether to go long or short on either silver or gold is not easy. By conducting the necessary research, any trader can make well-informed decisions on this front.