Gold-Silver Ratio and Its Utilisation in Long Term Silver Investing

Peter Arendas

doi:10.5901/mjss.2016.v7n1p285

Abstract

Gold-silver ratio is one of the best known ratios of commodity markets. The historical gold-silver ratio used to be approximately 15 which is almost in line with the estimates of geologists that there is 19 times more silver than gold in the Earth’s crust. The gold-silver ratio used to be administratively set during the era of bimetallism. But after silver and later also gold were eliminated from the monetary system, the gold-silver ratio started to fluctuate wildly. The gold-silver ratio is closely followed by many financial analysts and investors who try to estimate the future price development of both of the metals. The aim of this article is to find out whether the gold-silver ratio may be used as a cornerstone for a profitable long term investment strategy. The research shows that when investing in silver, a simple strategy based on the gold-silver ratio brings higher returns than the buy & hold strategy. The difference between returns of the two strategies is statistically significant in the long run. DOI: 10.5901/mjss.2016.v7n1p285

Highlights

Gold-silver ratio is one of the most closely followed ratios of the commodity markets
The empirical analysis shows that major increases of the gold-silver ratio are mostly related to growing gold prices and declining silver prices
The major declines of the gold-silver ratio are always related to growing silver prices

Summary

Introduction

Gold-silver ratio is one of the most closely followed ratios of the commodity markets. Gold as well as silver are precious metals and their prices are impacted by factors such as inflation expectations or fear. On the other hand silver has much wider industrial usage which means that silver price is significantly affected by the industrial demand. As a result, both of the metals have different dynamics of price development. Both of the metals have different dynamics of price development They tend to move in the same direction, the pace of price growths and declines is different. Silver price is more volatile and its price moves tend to be stronger. The gold-silver ratio isn’t stable but it changes remarkably over time. The aim of this article is to find out whether the gold-silver ratio may be used as a cornerstone for a profitable long term investment strategy

Objectives

Results

Discussion

Conclusion