Gold Silver Ratio Collapsing…
At Forex Trading-Pips we watch the Gold Silver ratio closely. Gold-silver ratio represents the number of troy ounces of silver it takes to buy a single troy ounce of gold and yesterday this ratio collapsed through an important line of support.
A break ‘down’ in the ratio means that silver is appreciating against gold or put another way gold now buys less silver than it did two days go. Gold is currently trading at $1624 per ounce versus silver at $28.89, and the gold-silver ratio is 56.21 (1624/28.89) down from 57.54 last Friday.
Why look at the Gold Silver Ratio?
Volatility in precious metals can be extreme. Instead of taking outright long or short positions in these markets, we much prefer to trade the spread relationship between Gold and Silver. Trading spreads significantly reduces risk and allows for increased leverage and superior risk adjusted returns.
Below is a daily chart of the ratio between spot gold XAU and spot silver XAG. Notice how the daily squeeze has fired off short and yesterday (Monday 20th August 2012) we broke key trend-line support to the downside.
XAUXAG Ratio
Taking a look at individual charts of Gold and Silver it’s clear that gold is currently lagging silver. Both metals are still in an extended consolidation and yet to breakout of triangle formations… however yesterdays break in the ratio gives us a warning ‘heads up’ that a move to the upside could be coming.
Silver futures daily bars
Gold futures recently lagging…
Gold futures daily bars
The break down in Gold against Silver gives us a bias for going long Silver whilst short Gold. The reason we trade the spread versus outright is twofold: If our analysis is correct then we expect silver to put in out-performance over gold as it frequently does during ‘bull moves’. If we get a down period during the up move, or if our analysis is plain wrong, then our shorts on gold should at least partially hedge some of our losses on silver and reduce our account volatility. We talk more on trading strategies later.
Leverage spot Gold and Silver no longer available at US Brokers
Due to recently enacted Dodd–Frank Wall Street Reform and Consumer Protection Act, Forex Brokers in US are prohibited from offering leveraged trading in precious metals to retail clients. Futures and Options are an alternative, however this entails higher capital requirements and is not suitable for small account holders. ETFs are also an option, but unfortunately have higher margin requirements. Overseas brokers will allow for leveraged positions in spot gold and silver for non US citizens. It’s important to be aware some brokers will increase margin if you trade the XAU/XAG ‘spread’ versus legging into the position with two trades (eg long XAU/USD short XAG/USD).
How to Trade the Gold to Silver Ratio for Explosive Profits
One of the best ways to play large out-sized moves in the financial markets is using some form of trend following methodology. Trend following enters in the direction of the trend and holds on until a trend / momentum change triggers an exit. Trade duration depends on parameters used: faster parameters enter and exit more frequently, slower parameters will enter late and get out late. Trend filters help to prevent whipsaw.
Once a trend is established and we have a position on, we use inside bars, pullbacks against the trend and Friday breakouts to gain additional exposure to the move.
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Information about the Gold Silver Ratio plus many more Robust Trading Strategies can be found at our Forex Strategy Pages.
