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What is gold to silver ratio trading?

Topics [ gold investing silver investing ]

The gold to silver price ratio is a measure of how many ounces of silver are required to buy an ounce of gold.

For a long period of human history both were monetary metals and the ratio was generally fixed. Today, however, the ratio floats – reflecting market forces that determine gold and silver prices on a daily basis.

The average gold to silver ratio during the 20th century was 47 to 1. Over the past 20 years the average has been nearer to 60 to 1.

 

For some hard assets enthusiasts, the gold to silver ratio is the basis of their precious metal trading strategy. In particular, they are interested in times when the ratio fluctuates widely from the prevailing norm.

The theory is that a high ratio signals it could be time to favour silver – which appears relatively cheap by historical standards.

Conversely, a low ratio may mean it could be a good time to purchase gold.

Currently the gold to silver ratio is spiking at 86 to 1, meaning it requires 86oz of silver to buy 1oz of gold. At well above its 10-year average of around 66 to 1, this abnormally high level could be interpreted as a powerful trading signal.

Of course, nothing is certain and given the nigh impossible task of picking extreme relative valuations between the metals, ratio trading presents many pitfalls for the unwary. Nevertheless, it is useful to be aware of the ratio when researching the many factors likely to affect precious metal prices.

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