Gold/Silver Ratio

What It Does

The gold/silver ratio is the number of silver ounces that one ounce of gold buys. It is a single value that summarizes how the two metals are priced relative to each other, and it tends to mean-revert across decades. When fear dominates, investors crowd into gold faster than silver, the ratio stretches high, and silver looks cheap relative to gold. When confidence returns and industrial demand picks up, silver tends to catch up, and the ratio compresses back toward its long-run range.

This strategy expresses that mean-reversion thesis directly. On each daily close it computes:

GSR = gold_close / silver_close

When GSR is very high (default: at or above 90), the strategy assumes silver is priced at a fear-driven extreme and positions for compression. It sells 1 gold futures contract and buys 10 silver futures contracts at the same time. The short-gold leg profits if gold falls; the long-silver leg profits if silver rallies. Either leg, or both, can drive the eventual gain when the ratio normalizes.

When the ratio compresses back below the exit threshold (default: below 75), the strategy flattens both legs together and goes flat.

The trade is one-sided. The strategy never takes the opposite position (long gold, short silver) when the ratio looks compressed. It sits flat between trades, and those flat stretches can last years. Historically the ratio has only stretched above 90 a handful of times per decade, so expect rare entries and holding periods measured in months rather than days.

The 1 gold to 10 silver sizing is a convention carried from the reference article, not a dollar-neutral hedge. At typical prices the silver leg carries several times the notional of the gold leg, so the realized P&L is driven mostly by silver rallying rather than gold falling. That is consistent with how the trade tends to resolve historically, but worth naming rather than hiding.

Key Characteristics

• Daily evaluation on the close of both contracts
• One-sided short-the-ratio trade; no opposite-direction entries
• No stops and no profit targets; the exit threshold is the only unwind trigger
• Always flat between trades
• Fixed 1 gold : 10 silver sizing by default, configurable

Known Weaknesses

• Long holding periods. Each trade can sit open for many months, and the unrealized drawdown inside the hold can reach the low tens of percent of initial capital before recovery
• Very low trade frequency. The strategy spends most of its time flat
• Strict threshold evaluation. If the ratio briefly pierces the exit level and snaps back, the strategy will exit and may re-enter on the next cross above the entry threshold, producing more trades than a smoother implementation would
• Silver-dominated P&L. The trade profits much more from silver rallying than from gold falling, so it is not a true relative-value hedge

Best In

• Macro regimes where the metals complex is rotating and the ratio has room to normalize after a stress spike
• Portfolios that can tolerate long idle periods and months-long holding windows
• Capital sized so that the larger silver leg is not margin-dominant

Further Reading

• Gold-Silver Ratio: A Market Thermometer for Fear and Confidence