Playing the Ratio Game: Gold and Silver
Mike Ong, Senior Dealer
Mike is a member of the largest dealing team that specialises in Equities, ETFs, CFDs & Bonds and the team manages >50,000 client accounts in Phillip Securities. He evaluates stocks using fundamentals and he believes in investing long-term for passive income. He is currently the chief editor of the HQ education series that aim to equip clients with tools & skillsets to make better investing and trading decisions.
Republished On: 5 August 2020 | 11:00 AM
Gold price has surged to Multi-year high recently, generating massive interest in this investment amidst market uncertainties and low interest rates. This article will give you an appreciation of gold and silver, and the gold/silver ratio.
Known as the “Crisis Commodity” for its ability to retain value during financial and geopolitical uncertainties, gold has appreciated in value over the past one year. However, gold has less a popular sister known as “silver”. As prices of gold and silver tend to move in tandem, potential investment opportunities arise when silver prices differ significantly from that of gold.
Apart from gold, silver is another metal that could provide protection in times of uncertainty. Here are some reasons why you can also consider Silver as investment.
- Silver can provide some inflation hedge in the long run. However, do take note that the precious metals market does not always track inflation well in the near term.
- Silver is more affordable as its price is much lower than gold.
- Silver’s metallic characteristics make it a key component in industrial uses such as solar panels. The growing concern for global warming and push for renewable energy sources could lead to an increased demand for silver.
- Price of silver is affected by supply and demand. Silver is rarely found alone and more commonly found in ores that contain lead, copper, gold and other metals, which are also commercially valuable. In 2018, copper, zinc and lead form about 61% for silver mine production by source metal (see Figure 1 below from Statista). When the economy starts to slow down, the production for copper, zinc and lead also decreases, indirectly reducing the supply for silver. The difference between supply & demand can lead to price appreciation of silver.
Figure 1: Silver Mine Production by Source Metal1
- There is potentially a higher appreciation value of silver in times of economic uncertainty as compared to gold – this can be explained by the gold/silver ratio which will be discussed later.
Figure 2: Gold/Silver ratio chart for past 30 years from macrotrends
We can use the gold/silver ratio to explore possible investing or trading strategies. We can see from Figure 2 that the gold/silver ratio ranges from around 31.6 to 114.77 (as of August 2020). A high gold/silver ratio means that the value of gold is relatively expensive as compared to silver and vice versa.
Gold/Silver Ratio Investing Example
When you notice that the gold/silver ratio is higher as compared to historic averages, you can consider purchasing some silver. When the ratio is lower as compared to historic average, you might wish to get into gold instead. Using this process, you can continue to build up your inventory of gold and silver over time. This strategy may take a couple of years but is useful if you are intending to hold precious metals commodities in your portfolio. Of course, some people prefer to trade instead.
|Gold/Silver Ratio||Gold and Silver Price||Investing Signal|
|Historic high||Upward||Long Silver|
|Historic low||Upward||Long Gold|
Gold/Silver Ratio Trading Example
There are 3 steps to make use of the gold/silver ratio trend.
- Identify the trend of gold/silver ratio
- Determined the individual trend for gold and silver
- Use the table below as a guide line
|Gold/Silver Ratio||Gold and Silver Price||Trading Signal|
1. Identify the trend of gold/silver Ratio. Based on Figure 3, we can see that the gold/silver ratio forms an uptrend.
Figure 3: Gold/Silver ratio chart (Dec-18 to Jul-19)
2. Determine the individual trend for gold and silver. Based on the gold and silver chart in Figure 4 and 5 respectively, we can see that gold and silver are on an uptrend.
Figure 4: Gold chart (Dec-18 to Jul-19)
Figure 5: Silver chart (Dec-18 to Jul-19)
3. Refer to the table as a guideline. Based on the table below, the trading signal is to buy gold.
|Gold/Silver Ratio||Gold and Silver Price||Trading Signal|
We hope that you have a better understanding on how you can use the gold/silver ratio for trading now! When you are trading, be sure to always practice good risk management habits:
- Use of risk reward ratio to compute expected return over potential losses
- Amount of capital to risk on a trade
- Stop loss for every trade
If you’re interested in trading gold and silver, here is the list of CFDs that we offer:
If you have any questions on trading or investing, feel free to drop us an email at firstname.lastname@example.org and we will be glad to assist you through your investment journey. There are also FREE CFD seminars that you can attend to learn more about this derivative product! Be sure to also check out our other gold articles here too!
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