Gold Silver Chart Ratio Strategy: Rules and Backtest Insights
If you have been trading or just following the gold and silver markets, you must have heard about the gold-silver ratio. What does the gold-silver chart ratio strategy mean?
The gold-silver chart ratio strategy is a technique for trading the two precious metals (silver and gold) using the relationship between their prices. The gold/silver ratio shows the number of silver ounces you would need to trade to receive the value of one ounce of gold at current market prices. It is a powerful trading signal that can help to identify buying or selling opportunities in the two precious metals.
In this post, we take a look at the gold/silver ratio and we backtest a gold silver chart ratio strategy.
What is the gold/silver ratio?
The gold-silver chart ratio strategy is a technique for trading the two precious metals (silver and gold) using the relationship between their prices. The gold/silver ratio shows the number of silver ounces you would need to trade to receive the value of one ounce of gold at current market prices. For example, if the price of gold is $900 an ounce and the price of silver is $15 an ounce, then the gold-silver ratio is 60:1.
The gold/silver ratio is a powerful trading signal that can help to identify buying or selling opportunities in the two precious metals. While the ratio might seem like a simple indicator, it is the oldest continuously tracked exchange rate in history. The ratio is important to traders because gold and silver prices have such a well-established correlation and have rarely deviated from one another. Traders use it to know when to buy or sell either of the two metals. In fact, the gold-silver ratio has been one of the most reliable technical indicators for a ‘buy’ signal in silver, whenever the ratio climbs above 80.
How does the gold/silver ratio work?
The gold/silver ratio is calculated by dividing the current gold price by the current silver price. It does not matter the currency you price them, as long as you use the same currency for each metal and for the same weight. So, they can be priced in US dollars per troy ounce or euros per kilogram, or pounds per ounce.
As an example, if gold trades at $700 per ounce and silver at $14, the gold/silver ratio would be 50:1. Similarly, if the price of gold is $8000 per ounce and silver is trading at $10, the ratio would be 80:1. Since the removal of the gold standard, the prices of gold and silver are left to float and so does the gold/silver ratio.
When the gold/silver ratio is high it means that gold is expensive compared with silver, or the other way around: silver is cheap relative to gold. Here are the four ways the ratio can increase or decrease:
- The gold/silver ratio increases when the price of gold increases faster than the price of silver.
- It decreases when the price of silver increases faster than the price of gold.
- It increases when the price of silver decreases faster than the price of gold.
- It decreases when the price of gold decreases faster than the price of silver.
How do you use the gold/silver ratio?
You use the gold/silver ratio as an indicator when trading gold and silver and other related instruments.
Generally, traders use the ratio on a contrarian or mean-reversion basis. That is, when the ratio is very high (which means that gold is relatively overprice