Investing in Precious Metals - The Gold/Silver Ratio Explained

20 Year Gold/Silver Ratio Chart

Gold has been one of the best investments in 2016, with the $GLD (the most liquid/heavily traded ETF which tracks the underlying price of the commodity) up over 27% on the year & the $GDX (large cap global gold miners ETF) up a whopping 124%.  These returns are nothing to sneeze at.  If you have caught wind of any recent headlines on the markets, you simply cannot avoid all of the Gold bugs raving about a major trend change (which I agree with).

If you are bullish on precious metals, then you should add the Gold/Silver ratio to your investing toolbox.  The above is the 20 year chart of the Gold/Silver ratio.  What is the Gold/Silver ratio?  Simply put, it's the ratio of the number of silver ounces it takes to buy an ounce of Gold.  When the ratio is falling, this means that silver is outperforming gold (& vice versa when rising).

Over the last 20 years we have seen a range of 93.73 - 30.70.  Based on the last 20 years, we observe that any reading in the 55-70 range is neutral.

How do we use this ratio to interpret our investments?  First off, precious metals typically move together.  This strategy should only be used when precious metals are in a bull market/have been acting healthy as a group (which by almost all technical measures, they currently are).  When we get a higher reading (>70), we should lean towards putting money to work in Silver.  Conversely, when the ratio drops below 55, we should lean towards investing in Gold.

We closed Friday at 67.84.  I'll be watching for any more upside in the Gold/Silver ratio (>70) to dip my toes into a Silver position.

I will go over the Platinum/Gold ratio in my next post.  Until then, good luck & God bless!