Gold to Silver Ratio – or Silver to Gold Ratio – is a simple concept. The amount of Silver it takes to purchase one ounce of Gold. There is, however, a complex theory behind that simple definition.
It is believed by those who support this theory that when the Gold to Silver Ratio is high, it is “Silver friendly”. At this relatively low price, it might be a better time to sell Gold and buy Silver.
The ratio becomes “Gold friendly” when it falls to the lower end of its range. In this philosophy, Silver is sold to buy Gold because Gold is a cheaper Precious Metal investment for those who follow it.
History Of Gold & Silver Values
There is a long history of this theory, but economists have not been able to prove that it is anything more than a positive correlation. There are many popular techniques in technical analysis that could be criticized in the same way.
Precious metals are often compared according to their Gold to Silver Ratio to determine which is the better investment at a given time. It presents an important corollary if this is true.
When one metal is overpriced, an investor can liquidate it and invest the liquid capital into the underpriced metal.
According to this theory, if the investor timed their Precious Metal transactions perfectly, their net ounces would increase without spending any more money.
Are There Ratio Opportunities In The New Era Of Precious Metals Investing?
During the financial crisis, investors sought security in Gold, which enjoys record-high values. As the immediate financial peril passed, many Gold investors liquidated their holdings, resulting in volatile Gold prices. The spot price of silver was also volatile at that time, both due to investor demand and shortage rumors.
Volatility may have contributed to the “all-in” or “all-out” investing style common in the United States. Silver and gold products demonstrate public trust in fiat paper money. When paper money becomes untrustworthy, market volatility occurs. It is a barrier for many new investors who want to buy or sell silver and gold.
Using the Gold to Silver Trading Ratio is difficult for most Precious Metal investors due to the requirement of timing purchases with near perfection. The price swings in both metals have been historically massive over decades of data, making the ratio unreliable. Furthermore, most small investors lack the resources to back up their investments if they misjudge the market.
Does this theory work? History suggests it is a false tool, or more likely, didn’t exist.
During and immediately after World War II, when both metals had fixed prices, the Gold to Silver Ratio was of no use to investors. Ratios have been little more than speculation.
How Stable Is The Ratio?
A major criticism of the Gold to Silver Ratio is its instability. A wide swing in either metal can benefit only short-term traders or market manipulators. In the early 2000s, when both metals were traded on the open market, the Gold to Silver Ratio averaged 55.5:1. So those people who traded in gold and silver actually earned a profit and again invest in gold and silver trading. if you are interested and want to trade in gold and silver. Then you can trade on ISA Bullion and earn an initial profit on your first trade.
There have also been massive swings in the ratio based on rumors or political and economic events that offer little insight into the underlying value of either metal. The ratio’s event-driven responses are more closely related to aesthetics than value.
When currency markets falter and inflation fears rise, gold has been popular with individual investors during the economic upheaval. Alternatively, Silver tends to do well when technological or industry demand is high and can be positively correlated with stock market performance. Investors’ responses to these changing dynamics can create wide swings in the ratio.
The Gold to Silver Ratio only works if the investor consistently predicts which metal is overpriced and underpriced at any given moment.
Besides mining output, industrial demand, fabrication demand, and central bank sales and purchases, other market factors can influence Gold and Silver prices today. Therefore, no single tool or ratio can be used to determine the value of either precious metal. Read more blogs
