For investors, there’s no shortage of investment opportunities to choose from.

There are thousands of different stocks, countless mutual funds, and also a seemingly endless number of corporate and government bonds to consider investing in.

But one of the most popular investment opportunities has always been precious metals.

For the experienced investor, the gold-to-silver ratio is one of the many indicators used to determine the right (and the wrong) times to buy or sell precious metals.

And it can be a very useful tool if you understand its metrics.

Other factors, of course — including economic uncertainty, inflation frenzy, and debt — have encouraged many to invest in silver and gold. And over the past few years, small-scale investors have started to climb aboard, as well.

Yet, despite these market developments, the gold-to-silver ratio remains a vague and elusive mystery for many.

This is unfortunate because there’s great profit potential in using a number of well-established strategies that rely on this ratio.

So, What Is the Gold-to-Silver Ratio?

Good question.

First, a simple answer: The gold-to-silver ratio is the amount of silver that it takes to purchase a single ounce of gold.

It sounds simple, but this ratio is far more useful than you may think…

For example: If the ratio stood at approximately 50 to 1 at current market prices, it would take 50 oz. of silver to buy 1 oz. of gold.

While there are countless websites that can provide the current ratio for you, it’s relatively painless to calculate on your own.

Simply take the current market price of gold, divide it by the current market price of silver, and voilà — you have the current gold-to-silver ratio.

Now that you’ve successfully calculated the ratio, how are you supposed to interpret it?

When the ratio is high, the general consensus is that silver is favored. This is because, relative to the ratio, silver is somewhat cheap.

Conversely, a low ratio tends to favor gold, signaling that it’s a good time to buy the yellow metal. In some instances, investors will trade their silver for gold as the ratio falls.

However, the ratio can be difficult to accurately read for inexperienced investors since it fluctuates so frequently, making potential profits somewhat elusive.

How to Trade the Gold-to-Silver Ratio?

First off, trading the ratio is an activity that’s primarily undertaken by hard asset enthusiasts.

Why? Because the trade is predicated by accumulating greater quantities of the metal and not by increasing dollar-value profits…

Let’s look at an example:

• When a trader possesses 1 oz. of gold and the ratio rises to an unprecedented 100, the trader would then sell their 1 oz. of gold for 100 oz. of silver.

• When the ratio then decreases to around 50, the trader would then sell their 100 oz. of silver for 2 oz. of gold.

• In this manner, the trader would continue accumulating greater and greater quantities of metal, seeking “extreme” ratio numbers from which to trade and maximize their holdings.

It’s also important to note that no dollar value is considered when making these trades. The relative value of the metal is considered unimportant. The goal is for achieving greater quantities of each hard asset.

And for those who are worried about devaluation, deflation, currency replacement, or even war, this strategy of trading makes sense. Precious metals have always proven to be sound investments in maintaining their value in the face of any contingency that threatens the worth of a nation’s fiat currency.

But there are some drawbacks to this trading strategy…

The obvious difficulty is with correctly identifying those “extreme” relative valuations between the metals.

Let’s say the ratio hits 100 and you sell your gold for some silver. The ratio then continues to expand, hovering between 120 and 150 for the next five years, making you stuck.

A new trading precedent has apparently been set. And to trade back to gold during that period would mean a contraction in your metal holdings.

So, what can you do in this case?

You should always continue to add to your silver holdings and wait for a contraction in the ratio but also remember that nothing is certain…

This is the essential risk to those who are trading the ratio.

It also points out the need to successfully monitor ratio changes over the short and medium term in order to catch the more likely “extremes” as they emerge.

How’s the Ratio Looking in 2017?

Some experts predict that the gold-to-silver ratio will return to its long-term, pre-1900 average of 16 to 1. Many factors are cited in this favorable claim. It is worth noting, however, that among these experts are some of the most ardent advocates of silver investing.

Most precious metals experienced a rebound on Friday, September 22nd, after falling for a few days, indicating strength for gold.

Currently, the ratio is sitting at 78. This means that it takes approximately 78 oz. of silver to buy 1 oz. of gold.

Just a few weeks ago, the ratio stood at 74. But on Friday the 22nd, the ratio had an intraday high above 78 and has been sitting stagnant with no fluctuations for a few days now.

However, the relative strength index of the gold-silver spread is 71.6. Such a high level indicates the possibility of a fall in price.

Any rise in the ratio indicates strength for gold. So, since the ratio has given no indication of moving upward anytime soon, perhaps now would be a good time to buy silver.

The Bottom Line

It’s important to recognize that the gold-to-silver ratio isn’t a primary investment factor or a catalyst on its own. It’s a secondary factor to consider after you’ve examined the real catalysts that are driving gold and silver prices.

Pay attention to the Fed’s monetary policy and interest rates. Supply and demand is also an important driver for precious metals.

Finally, fear and uncertainty are important catalysts that tend to drive investors toward gold and silver.

Just make sure that you pay attention to all factors, instead of solely relying on the ratio alone, and that you also know your own trading personality and risk profile.

But for the hard asset investor who’s concerned with the ongoing value of their nation’s fiat currency, the gold-to-silver ratio trade offers the security of knowing, at the very least, that they’ll always possess some amount of precious metals.

That’s all for now.

Until next time,

John Peterson
Pro Trader Today