Fundamental analysis Macroeconomic indicators

Gold to Silver Ratio (GSR): shall you check it out?

Елена Берсенева 10 October 2023 301 Gold to Silver Ratio (GSR): shall you check it out?

Silver and gold have been proving their worth for centuries. And the ratio of their values has been measured since Ancient Rome. Back then, these two metals played a major role in calculating the value of coins. Today, the ratio is used as an indicator for traders and investors in the metals market.


The Gold to Silver Ratio shows an amount by which an ounce of gold is more expensive than an ounce of silver, or how many ounces of the latter are equal to an ounce of the former. The ratio helps to determine whether any of the two metals are overpriced or underpriced.


Today, the ratio is fluctuating just above the level of 80. The indicator reached its highest point of 128.5 in March 2020 in the midst of the COVID-19 pandemic.


Gold has traditionally been in demand as a safe haven asset during periods of high inflation and recessions. Silver, in addition to its properties as a precious metal, is also widely used in industry.


The ratio between the two could indicate a growing need for industrial metals, or it could signal the approaching global economic slowdown, or recession.


Hypothesis

Let's check if it is possible to make money using the gold to silver ratio (GSR).


How we check it

Symbols:


Test period: March 2001 — September 2023


Timeframe: D1


Market Entry:

  • buying gold and selling silver at the opening of the next trading day if the GSR falls below the lower threshold;
  • selling gold and buying silver at the opening of the next trading day if the GSR exceeds the upper threshold.


Combinations of upper and lower thresholds:

  •   90 – 80
  •   90 – 70
  •   80 – 70
  •   80 – 50


Market Exit: a reverse trade at the opening of the next trading day, when the GSR gets lower or higher than the threshold that was crossed at the opening of the trade.


Indicators:


Results

Gold to Silver Ratio (GSR): shall you check it out? - Photo 1Gold to Silver Ratio (GSR): shall you check it out? - Photo 2Gold to Silver Ratio (GSR): shall you check it out? - Photo 3Gold to Silver Ratio (GSR): shall you check it out? - Photo 4

Conclusions

It's possible to make profit by using the gold to silver ratio in trading.


The best result was shown by a combination of the upper threshold at 90 and the lower threshold at 80. The average return of the signal amounted to 2.89%, and the total return is about 97%.


The maximum drawdown for the whole testing period was less than 5%.


So, the gold to silver ratio is worth taking into account and applying in trading strategies for these metals.

 

Appendices

Gold/silver ratio in the precious metals market MarketCheese – the profitability of the gold to silver ratio as a trading signal in the precious metals market has been identified;


Detailed results of the research:

XLSX (0.45 MB)Gold_To_Silver_Ratio.xlsx

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