Trading Using the Gold-Silver Ratio

The gold-silver ratio is used by precious metals traders across the world. It has been used for centuries and continues to be relevant. The gold-silver ratio is essentially the number of ounces of silver that it takes to buy an ounce of gold. While it may seem like a simple concept, it actually provides investors with a lot of value. Here are the basics of the gold-silver ratio, and why it is important.

Gold-Silver Ratio

The gold-silver ratio is commonly used by precious metals traders interested in trading back and forth between gold and silver. If gold is trading at $500 per ounce and silver is trading at $5 per ounce, the gold-silver ratio is 100. This means that you have to have 100 ounces of silver to buy one ounce of gold. In today's market, the gold-silver ratio usually remains fairly constant.

Trading the Ratio

The idea behind trading the ratio is that you look for extremes in the ratio before you act. For example, if the gold-silver ratio goes up to 200, the trader would then sell her ounce of gold for 200 ounces of silver. At that point, she would wait until the ratio comes back down again. When the ratio comes down to 100, she could then trade that 200 ounces of silver for 2 ounces of gold. By doing this, she will be able to accumulate more gold as she goes along.

Ignore the Dollar Figures

One of the unique features of trading the gold-silver ratio is that you do not pay attention to the dollar value of the transaction. Instead, you are purely interested in the ratio of gold to silver. Even though the prices of both of these precious metals will fluctuate, their inherent value is always there. Therefore, if you are worried about inflation, this could present you with a valuable investment opportunity. 

How to Trade

If you are interested in trading the gold-silver ratio, you have a few different options to pursue. First of all, you could actually purchase real gold or silver bullion. This is typically the most difficult method of executing this trade because you have to physically ship the gold and silver bullion and protect it. 

Another, easier way to do this is to get involved with a futures broker. You can buy and sell gold and silver futures contracts in order to complete this trade. Some people find this confusing, but after a little bit of practice, you should be able to trade futures just as you trade stocks.

You can also get involved with options trading on gold and silver. By taking out an option on gold or silver, you have the right to purchase a certain amount of the metals, but you do not have the obligation to do so if circumstances change.

You could also potentially access this trade by investing in ETFs or commodity pools.

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