Gold-Silver Ratio (GSR) Explained: Definition, History, and Trading Strategies
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Gold-Silver Ratio (GSR) Explained
Definition, History, and Trading Strategies for one of the most popular measurements when managing precious metal investments
The Gold-Silver ratio or GSR is one of the most popular measurements when managing precious metal investments. The GSR can be used when you are trying to make decisions on trades related to precious metals. More specifically you can decide when to buy and sell gold and silver by comparing their prices relative to one another.
The Gold-Silver ratio is a helpful tool to understand broader market and economic conditions. Depending on the direction of the ratio, you can gauge whether the economy may be approaching a recession or if inflation is getting out of hand.
What is the Gold-Silver Ratio?
The GSR is the current price of an ounce of gold divided by an ounce of silver. In other words, the ratio measures how many ounces of silver you need to buy one ounce of gold.
This means gold is 100 times more expensive than silver
This ratio is used by long-term investors and day traders to determine which precious metal will perform better than the other. You can use this ratio when trying to determine the amount of gold or silver you plan to allocate in your investment portfolio or whether there will be a change in market sentiment.
The prices of gold and silver tend to move together, so the gold-silver ratio is a helpful way to show the relationship between the prices of these precious metals. Investors use the ratio to either buy or sell gold or silver depending on the market's conditions.
Market Dynamics
Investors tend to buy gold because it's a safe haven asset, whereas silver's demand changes based on industrial uses. When demand for gold is higher, the Gold-Silver ratio increases and when industrial production rises, the demand for silver rises, which results in the GSR falling.
Gold-Silver Ratio Trading Strategies
Commodity traders use the Gold-Silver ratio to gauge market sentiment. Market participants can trade the GSR and hedge their bets by taking a long or short position on either gold or silver. Traders must understand when the Gold-Silver ratio has reached extreme levels compared to historical performance to indicate whether there are gold or silver buying opportunities.
When the G/S ratio is rising this could be an indication to traders that market fears are on the rise and market participants are turning to gold for protection. A falling GSR simply means that the price of gold is getting less expensive relative to the price of silver.
Since a rising G/S ratio means the gold price outperforms silver and that more silver is required to purchase an ounce of gold, a high Gold-Silver ratio means that silver is cheaper than gold, so it may be a good time to buy silver since the price is lower.
History of the Gold-Silver Ratio
As far back as Ancient Lydia, the first kingdom to make gold and silver coins, the GSR was roughly 10:1. That ratio has fluctuated throughout human history, but it has mainly moved in favor of gold over time. During the time of the American colonies, the Gold-Silver ratio was generally between 15:1 and 16:1.
The average Gold-Silver ratio during the 20th century was 47:1 and over the past two decades, the GSR averaged roughly 60:1. The current ratio is about 79, a historical high. The ratio's historical extremes are a high of 80 and low of 40. Gold has always been more expensive than silver and these averages indicate that silver is a historically undervalued asset compared to gold.
During the height of COVID-19 in March 2020, the GSR was at a high of more than 120. This was because people feared the virus, the stock market tanked and there was a lot of uncertainty in the markets. As a result, investors flocked to the safe haven asset, gold. In 2020, gold reached an all-time high, passing $2,000.
Why Does the Gold-Silver Ratio Matter?
The gold-silver ratio measures the price of gold relative to the price of silver. The ratio is an indicator of how many ounces of silver is required to buy one ounce of gold. The GSR is used by investors to gauge the valuation of metals to make buy and sell decisions of both precious metals.
Investment Applications
Whether you're a long-term investor, a day trader, or looking to invest in gold or silver for the first time, the Gold-Silver ratio can be used to understand the precious metals market and how to treat them in your investment portfolio or short-term trading strategy.
A rise in the GSR means that gold is getting more expensive relative to silver and when the GSR falls, the reverse holds true. When the Gold-Silver ratio is high, precious metal traders prefer to buy silver compared to gold and when the ratio is lower, gold is the preferred precious metal.