Investing in precious metals is becoming increasingly popular. Throughout history, people have always purchased gold as a “natural insurance”. This allows wealth to be saved during periods of inflation or geopolitical disturbances. Silver is also popular for the same reasons. Silver's demand is also affected by industrial output.
Some investors like to buy, sell and trade gold and silver based upon the gold-silver ratio.
What is the gold-silver ratio? It refers to the ratio of the silver price to the gold price, or amount of silver needed to purchase the same amount of gold. For instance, if the cost of 80 ounces of silver equals the cost of one ounce of gold, the ratio would be 80. If the value of gold rises more quickly than silver then the ratio increases, and vice versa.
Gold is regarded more as a currency while silver also has widespread applications in the industrial sector. This means that even though their prices are connected or related, there is still space for variations in the ratio.
The gold price is moved by market demand. The price of gold shoots up during stockmarket volatility, changes in currency value, etc., because it is considered a flight-to-safety asset. This is why many investors focus on gold. In addition to providing a safehaven, gold can have quite profitable price swings. Silver deman is affected by market conditions, but also by demand for industrial applications. These include electronics, medicine, solar panels, and so on.
The supply of both metals is declining as the cost of locating and mining these precious metals continues to increase.
Factors that affect the prices of gold and silver include, but are not limited to, changes in the strength of the U.S dollar, increases in interest rates, a recession affecting metal demand, inflation or a stock market crash..
To trade the gold-silver ratio, you would base your investment decisions on the ratio as though you were trading between both assets. The proceeds from selling the “overpriced” asset are then placed into the “undervalued” one. These positions are updated as and when the ratio changes.
Trading off of the gold-silver ration is a popular way for investors to be able to gauge where the price of metals stand, and whether they are overvalued or undervalued. This can help to make profitable trading decisions in the long run.