The Gold Silver Ratio, is it Worth Tracking?

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The Gold Silver Ratio, is it worth Tracking?

The Gold-Silver Ratio ( XAU/XAG ), is the number of ounces of silver it takes, to buy one ounce of Gold. It shows the relative performance of both Gold and Silver, further making it one of the most popular and the most debatable tools amongst bullion traders. The mathematical formula for the ratio is, Gold/Silver (in ozs.) So, for example, say one ounce of Gold = $1000 and similarly one ounce of Silver = $20. Then the Gold Silver Ratio will be 50 which is $1000/$20. But the real question is, what should you interpret from this data? And what are the levels that one should watch?
  
Analyzing the XAU/XAG Chart
Gold Silver Ratio Monthly Chart

Few points which can be observed from the monthly chart of the ratio given above are;

  1. It is quite evident that the ratio tends to move in a narrow range of 45-85 (highlighted in the chart). But with the increase in the volatility and uncertainty, we see sharp moves in the bullion twins, which further steers the ratio to trade out of its normal range. For instance, during the Covid crisis, the Gold-Silver ratio made a high close to the levels of 125-127, which is way above its historical high, normal range, and psychological level of 100. 
  2. The zone of 35-40 acts as a lower band for the ratio, which is highlighted by the green box in the chart.
  3. The statistical average when calculated for the period (January 2000 to August 2021) comes to about 65(approximation done). This signifies that the level of 65 has acted as a median point for several swing moves, which is also quite perceptible from the chart.

(Note:- Approximations have been done to derive these levels from the chart!)

Now that we have a basic idea of what the important levels are, let us jump on to the interpretations of these levels, and understand what a rising and falling ratio signifies.

The Rise and Fall Classification

The reasons for the rise in the ratio can be;

  1. Gold increases at a rate faster than Silver, signifying a greater buying pressure in Gold or,
  2. Silver decreases at a rate faster than Gold, signifying a greater selling pressure in Silver. 

Similarly, the reasons for a decrease in the ratio can be;

  1. Silver increases at a rate faster than Gold, signifying a greater buying pressure in Silver or,
  2. Gold decreases at a rate faster than Silver, signifying a greater selling pressure in Gold.

This is just a mathematical classification, to make a meaningful conclusion of the rise and fall, one should combine the ratio with the individual trends of both Gold and Silver. As both the assets are positively correlated, blindly taking reversal trades just because the ratio is at its upper or lower band is not the smartest thing to do. I hope, the meme given below illustrates the concept better.

An Example of Identifying Medium Term Trends/Breakouts using the Gold Silver Ratio and Relative Comparision 

Step 1. Identify the Trend of Gold and Silver
Gold Daily SupportSilver Daily Support
As we can clearly see from the charts, on 23rd March 2020, the selling pressure in Gold stabilized and it took support at its 200 days moving average. Silver also moved in tandem with Gold, however, it was still below its 200 days moving average. So, looking at the chart setup we can conclude that, Gold will most likely trade with a neutral-positive bias.   

Step 2. Identify the Buying/Selling Pressure using the Percentage Comparison   
Gold Silver Percentage Comparison

Now, as we have identified that Gold is stable and Silver is slightly positive, we will keep 23rd March 2020 as a base date for our relative comparison with the aim to find relative exponential price spikes. We see an exponential spike in Silver on 15th May 2020, highlighted by the purple box in the chart. Silver closed about 4.5% higher that day, however, Gold only closed about 0.5% higher that day. This makes the point clear that the buying pressure in Silver is quite significant and is undoubtedly a lot more than Gold, to further confirm this and get a better picture we will analyze and refer to the XAU/XAG chart.
Gold Silver Ratio Breakdown
We see that the ratio violated its support zone of 108-109 on the daily charts, and as identified earlier that the Buying Pressure is greater in Silver, we can make a decent projection (ceteris paribus) that the ratio will continue to fall (with Silver rising) till it reaches 100 (psychological level). 

Step 3. Projecting Price Targets using the Gold-Silver Ratio
Silver Daily Chart with Ratio LevelsGold Silver Ratio Daily Chart with Important LevelsChart Timeline

The charts and the timeline table gave above shows how Silver gave a short-term breakout rally and respected the important levels of the Gold-Silver Ratio. The breakout in Silver started when the Gold Silver Ratio broke its daily support of 108-109 on 15th May 2020, and the breakout rally of Silver lost its fuel when the ratio reached its statistical mean zone on 6th August 2020. To further quantify the intensity of the breakout, Silver Micro Futures in MCX went up to the levels of 75900 from 44600 within three months, after the move was identified.
 
Analyzing a historical chart is quite easy, however, taking such trading decisions in the live markets is the tough part. As the Bullions are affected by various events, one cannot simply just track the Gold Silver Ratio and expect returns. It is always better to look at the broader picture and understand the overall market sentiment.  So, Is the Gold Silver Ratio worth tracking? This still remains to be a debatable question, the answer for which lies in one’s trading style.

Disclaimer:- The Author is an independent multi-asset class Investor and Trader, and not a registered Investment Analyst and Advisor. This article has been written for educational purposes only and should and not be considered as an Investment or Trading Advice. Kindly contact your authorized stock advisor before taking any trades or investment decisions. Past performance is not a guarantee for a future return, nor is it an indication for any future performance. The information contained in this article has been compiled from a variety of official sources and is subject to change at any time without notice. The author gives no assurance or warranty that information on this site is current and accurate, and takes no responsibility for matters arising from changed circumstances or other information or material which may affect the accuracy of the information on this article.

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  • Mukesh Vy @Mukesh Vy
    very nice article, could you please share short term (15days) buy and sell level for gold and silver?I have brought silver 3 lots avg at 63180 and gold 2 lots avg 47050, when to exit?
    Like 1
    • Shivank Goswami @Shivank Goswami
      Mukesh Ji, As I am not a registered investment advisor, I cannot give you any trading ideas, recommendations or price targets. I hope you understand my concerns, Thank you! @Mukesh Vy
      Like 4
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  • Vishnu Rathore @Vishnu Rathore
    Very nicely written! Using the ratio to project price movements and price targets, was something I was not aware of, Thank you!
    Like 3
    • Shivank Goswami @Shivank Goswami
      Thank you for your kind review! @Vishnu Rathore
      Like 4
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  • Dev Kumar @Dev Kumar
    Amazing analysis Sir, the chart explanations are quite detailed!!!
    Like 3
    • Shivank Goswami @Shivank Goswami
      Thank you for your kind review! @Dev Kumar
      Like 4
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