You’ve probably heard a lot about the gold-to-silver ratio, but you might not have taken the time to stop and think about its implications. Further, you’ve probably bypassed it as a tool for determining optimal times to speculate in precious metals. We’d like to take this opportunity to point out some of the key takeaways from the strategy of using the gold-to-silver ratio to determine higher probability circumstances in the metals futures and options markets.
What is the gold-to-silver ratio?
First, let’s start by defining the ratio. Clearly, its title speaks for itself but to simplify the definition, the gold-to-silver ratio is simply the amount of silver it takes to purchase once ounce of gold. For instance, if the gold-to-silver ratio is 50-to-1, it would take 50 ounces of silver to buy 1 ounce of gold.
The gold-to-silver ratio has been tracked for roughly a century; during that time we’ve seen it fall into the 20-to-1 area, and increase toward the 100 to 1 area, but it is probably most comfortable between 50-to-1 and 60-to-1.
The “lazy”, yet most efficient, way to follow the gold-to-silver ratio is to visit one of the dozens of websites that track it such as Kitco (http://www.kitco.com/Gold_Silver_Ratio_Charts/gold-silver-ratio-charts.html). However, it can easily be calculated. Simply take the price of gold and divide it by the price of silver. For instance:
$1150 (gold price) / $16.00 (silver price) = 71.875 (or about 71 to 1)
To reiterate, assuming the price of gold and silver noted above it would take 71.875 ounces of silver to purchase a single ounce of gold.
How to use the gold-to-silver ratio
The gold-to-silver ratio is not the be-all and end-all solution for successful precious metals trading, but it can certainly be a highly valuable tool for those willing to corroborate their technical, fundamental, and seasonal analysis with another source. In addition, it might help you to determine which trading vehicle to use (gold or silver).
Continue reading about the gold-to-silver ratio on TraderPlanet.