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Want Precious Metal Exposure? Check Out the Silver-to-Gold Ratio

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Want Precious Metal Exposure? Check Out the Silver-to-Gold Ratio PART 1 OF 2

Want Precious Metal Exposure? Check Out the Silver-to-Gold Ratio

Gold-to-silver ratio

Investors keen on parking their money in precious metals could opt for cross-commodity spreads such as the gold-to-silver spread. The gold-to-silver spread, or the gold-to-silver ratio, measures the number of silver ounces it takes to buy a single ounce of gold. The ratio was trading at 83 as of February 29, 2016, which means that it would take 83 ounces of silver to buy one ounce of gold.

Whereas the gold-to-silver ratio measures the number of silver ounces needed to buy one gold ounce, the silver-to-gold ratio measures the number of gold ounces needed to buy one silver ounce. As these ratios have an inverse relation, the silver-to-gold ratio is cheap.

The recent trading price of this ratio is at an 8.5% premium over its 100-day moving average of 76.6. The RSI (relative strength indicator) for the gold-to-silver ratio is at 74, which suggests a possible overvaluation. RSI levels above 70 often indicate overvaluation, while those below 30 indicate undervaluation.

Want Precious Metal Exposure? Check Out the Silver-to-Gold Ratio

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Technical analysis

The steady surge in the gold-to-silver ratio since 2011 suggests that gold has gained strength in comparison to silver. The visible ups and downs in the ratio over the past decade suggest that the ratio is not stationary. However, over a span of one-and-a-half years, the ratio has maintained a trading range between 70 and 80. The recent surge above the 80 mark may cause it to revert to the trading range. The mean reverting level could be around 75 or 76.

Shifts in these metals are closely reflected by changes in ETFs such as the SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV). Other mining-based stocks that have been visibly impacted due to changes in gold and silver include Pan American Silver (PAAS), Coeur Mining (CDE), and Yamana Gold (AUY).

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