What is the gold-silver ratio?
Gold-silver ratio is an essential tool and indicator in the world of precious metals. Here we take a look at the gold-silver ratio definition, how to calculate the ratio and what it indicates.
The gold-silver refers to the ration between the value of gold relative to the value of silver. The ratio essentially takes into account how many ounces of silver are necessary to purchase an ounce of gold.
The ratio is used by investors to evaluate the prices of the two precious metals along with which precious metal to trade at any point in time. One may note that the gold-silver ratio fluctuates a lot, since the prices of gold and silver depend on the dynamics between supply and demand.
How does the gold-silver ratio work?
The gold-silver ratio can be calculated using the following formula:
Price of gold per ounce/Price of silver per ounce
An example of the gold-silver ratio would be if the price of gold was $1,800 an ounce and silver traded at $20 an ounce. In this case the gold-silver ratio would be 1800/20=90.
Gold-silver ratio explained
But what does the gold-silver ratio mean in the world of trading and investing? It is an important metric for hard-assets traders and investors as it shows the buying and selling pressures at play for the two precious metals.
For example, if the gold-silver ratio is going up, this could be due to the higher price of gold, which would indicate buying pressure on the yellow metal. It could also be due to the lower price of silver, which indicates a selling pressure on silver.
By studying the gold-silver ratio movements, investors can evaluate the change in valuations of the two commodities – both of which are considered safe-haven assets – to assess their fair value.
It is important to note that the gold-silver ratio has a psychological level of 100. A value above 100 would indicate higher volatility and uncertainty in the markets, while a value below 100 usually signals stability and steady economic growth.
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