The Gold to Silver Ratio – sometimes called the Silver to Gold Ratio – is a simple concept.
Those who stand behind this theory believe that when the Gold to Silver Ratio is high, it is “Silver friendly”. This might be a more optimal time to sell Gold and buy Silver at its relatively lower price.
When the ratio moves to the lower end of its range, it is “Gold friendly”. Those who adhere to this philosophy will sell Silver to buy Gold because Gold is the less expensive Precious Metal investment, relative to Silver.
History Of Gold & Silver Values
This theory has a lengthy history, however, economists have been unable to prove that it is more than a positive correlation. The same criticism could be leveled at many popular techniques used in contemporary technical analysis.
Proponents claim the Gold to Silver Ratio can be a predictor of which Precious Metal is the superior investment at a given time. If this is accurate, it presents an important corollary.
It should allow an investor to liquidate one metal when it is overpriced and invest the liquid capital in the underpriced metal to its advantage. The theory is that if the investor timed their Precious Metal transactions perfectly, their net ounces would increase without spending any additional money.
Are There Ratio Opportunities In The New Era Of Precious Metals Investing?
Over the past 10 years, Gold enjoyed record-high values as investors sought security against the banking crisis. Many Gold investors liquidated their holdings when the immediate financial peril passed, creating volatile Gold prices. Silver spot price was also volatile at that time, based both on investor demand and rumors of shortages.
This volatility may have been a factor in creating the “all-in” or “all-out” investor that is common in the United States. Gold and Silver products demonstrate the public trust in fiat paper money. When trust in paper money falters, it creates market volatility. This is a barrier for many new investors who want to buy and sell Silver and Gold.
The Gold to Silver Ratio is difficult for most Precious Metal investors to utilize because it requires an investor to time their purchases with near perfection. The swings in both metals have been historically massive over decades of price data, making the ratio unreliable. In addition, most small investors lack the resources to back up their investments if they misjudge the market.
So does this theory work? Market history would suggest it is a false tool, or more likely, did not exist. The only time the Gold to Silver Ratio was of any use to an investor was during and immediately after World War II when both metals had fixed prices. Since then, the ratio has been little more than speculation.
How Stable Is The Ratio?
The most important criticism of the Gold to Silver Ratio is its lack of stability. It is vulnerable to wide swings in both metals that benefit only short-term traders or market manipulators. A study in the early 2000s found an average Gold to Silver Ratio of 55.5:1 when both metals were traded on the open market.
The ratio has also been subject to massive swings in either direction based on rumors or political and economic events that provide little insight into the underlying value for either metal. These event-driven responses in the ratio are more closely related to aesthetics than value.
Gold has been popular with individual investors during periods of economic upheaval when currency markets falter and inflation fears rise. On the other hand, Silver tends to do well when technological or industry demand is strong and can show a positive correlation with stock market performance. This can create wide swings in the ratio when investors respond to these changing dynamics.
The Gold to Silver Ratio only works if the investor is consistently correct about which metal is overpriced and underpriced at any given time. It does not take into account other market factors that can impact Gold and Silver prices today, including mining output, industrial demand, fabrication demand, or central bank sales and purchases. As a result, no single tool or ratio can be used to determine the value of either Precious Metal.
What To Look For When Investing In Precious Metals
Precious Metals investors should always rely on many sources when determining their next investment strategy. While the Gold to Silver Ratio is an interesting theory, it should be considered on a case-by-case basis.
The first step begins with the investor understanding what investment tools are available, how they work, and how to use them correctly. Tools such as Precious Metal spot price charts are fundamental for new investors.
However, they do not have the predictive ability of longer-term analysis tools such as charts and graphs. Setting price alerts can also help you act quickly to purchase Silver and Gold.
It is important to take advantage of free tools such as daily price updates from reputable sources to keep a finger on the pulse of market movement. As a day trader, it can be helpful to start watching for opportunities in which one metal is significantly over-priced compared to the other.
This may provide early signals that the Gold to Silver Ratio is in an unstable position. If you are a long-term investor, wait for signs of extreme weakness in either metal to present buying opportunities at more reasonable ratios.
The Gold To Silver Ratio Can Be Unreliable
To become successful using the Gold to Silver Ratio, it is necessary to predict the future value of both Precious Metals. As with any speculative theory, this is next to impossible.
Once you understand the limitations of the ratio, it becomes less effective as a predictive tool and more valuable as an indicator for short-term investment opportunities. If you find that one metal is significantly overpriced compared to the other, that can indicate a market shift that can lead to buying opportunities in either metal.
The old saying goes, “One man’s trash is another man’s treasure”. Even if you think one metal is underpriced compared to another, you may have difficulty choosing which one to buy. This dilemma points to a key lesson in Precious Metal investing: no single investment tool is perfect.
Which Metal Is Rising While The Other Is Falling?
To apply the Gold to Silver Ratio effectively, you need to understand the primary factors impacting metal prices. This starts with being aware of what drives demand for Precious Metals— investment, technological, industrial, or fabrication.
As with any analysis of future value, it is important to stay up-to-date on the issues impacting the supply and demand for each metal. Changes in mining output can have a significant impact on price. An increase in technology use can influence prices as well. Any new applications for either metal can affect the price as well as any negative changes, such as regulations that limit fabrication.
To effectively use the ratio, be sure to have a full understanding of these factors and how they interact with one another.
One common mistake those new to investing in Silver and Gold make is assuming that more expensive metals are always better investments.
Reintroducing The Gold To Silver Ratio To Everyday Precious Metals Investors
It is easy to conclude coin dealers in previous eras adhered to the Gold to Silver Ratio because it was good for business. However, one might also perceive a fundamental relationship between Gold and Silver as part of the natural order. If this were accurate, wouldn’t many more people use this theory for financial gain? These investment questions are an extension of Precious Metals markets’ technical versus fundamental analysis.
The repeating chart patterns in technical analyses are useful in talking about what the market might do in the future. The fundamentalist approach discounts technical analysis, viewing charting as busy work that merely expresses the beliefs of the analyst.
The question remains: Is there a correlation between technical analysis and price patterns, or are positive results created because of self-fulfilling prophesies? In other words, do so many people act on a certain pattern that the anticipated outcome is a foregone conclusion?
Knowledge Is Power
Like any other technical trading data we might examine to help us make investment decisions, the Gold to Silver Ratio is theoretical and therefore fallible.
This discussion of it is presented for informational and educational purposes only. The Silver to Gold Ratio is a fascinating possibility for Precious Metals investors but be sure to research further and consult with your financial advisors first.
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