Is everyone too busy watching gold break records to notice silver’s incredible potential?!
Silver is flying under the radar and looks potentially undervalued based on historical metrics. The next major move in precious metals might belong to silver.
While gold has been stealing the spotlight by surging above $3,000/oz, silver might be ready for its moment in the moon.
Why Gold is Crushing It
Gold is having a moment!
The yellow metal has been acting as the ultimate safe-haven asset amid:
Gold has surged 25% since the beginning of the year. while silver has posted a respectable but less flashy 16% gain. But here’s where things get interesting…
Your Secret Weapon: The Gold-to-Silver Ratio (GSR)
The Gold-to-Silver Ratio (GSR) is a simple yet powerful metric that tells you how many ounces of silver it takes to buy one ounce of gold.
Right now, that number is wiggling around at a whopping 100:1.
Translation? It takes 100 ounces of silver to buy ONE ounce of gold right now!
In the past few decades, the ratio has typically bounced between 40:1 and 80:1.
And when it stretches this far, silver eventually dumps with explosive force. 💩
Think of the GSR like a rubber band; when it stretches too far, it eventually snaps back.
Historically, whenever this ratio widens significantly, it inevitably returns to the mean, and sometimes overshoots in the opposite direction.
Silver hasn’t even come close to its all-time high of $49.95 during this precious metals bull run. It’s still ~35% below its historical peak, while gold is breaking price records.
Gold-to-Silver Ratio (GSR) Cheat Sheet
Here’s a handy cheat sheet for GSR:
| Definition | Measures how many ounces of silver (XAG) are needed to buy one ounce of gold (XAU). |
| Current Level | Elevated, around 100:1 |
| Historical Norm | Typically trades in the 40:1 to 80:1 range. Readings above 80:1 are considered high and signal that silver is undervalued compared to gold. |
| Historical Extreme | Readings near or above 100:1 are historically rare and signify a significant deviation from the norm. |
| Trading Signal | When the GSR is extremely high, it historically reverts to the mean (ratio decreases), suggesting potential Silver outperformance relative to Gold. The ratio can even overshoot the mean. |
| Price Context | Supports the relative value signal: Silver remains significantly (~35%) below its All-Time High (ATH) of ~$49.95, while Gold has been making new ATHs. |
The Silver-Gold Dance
Gold and silver typically move together (correlation of 0.63 since 1968), but silver is the dramatic partner in this relationship.
On average, for every 1% move in gold (up or down), silver tends to move 3%.
That’s like gold walking while silver runs a sprint!
Not Just Pretty Numbers. Fundamentals Matter!
Silver isn’t just about charts and ratios, it has solid fundamentals backing it up:
Monetary Metal: Physical investment is growing, especially among retail buyers who view silver as “people’s gold.”
Industrial Metal: Silver demand is surging from:
- Electric vehicles (which use more silver than traditional cars).
- Solar panels (one of the fastest-growing silver demand sources).
- Electronics, 5G tech, medical devices, and defense systems.
Why Isn’t Silver Moving Yet?
It’s all about timing and sentiment.
Typically, during risk-off periods or market uncertainty, institutional money flows into gold first due to its established safe-haven status. Silver often lags initially and then plays catch-up.
If this historical pattern holds, the second leg of this metals rally could belong to silver.
The Setup: Why Silver Looks Poised
The combination of factors presents a compelling case for potential silver outperformance:
- Extreme GSR: Signaling historical undervaluation relative to gold.
- Strong Industrial Demand: Providing a fundamental underpinning beyond monetary factors.
- Potential Supply Constraints: Rising demand hints at potential future supply issues.
- Hard Asset Revaluation Environment: Broader market trends favouring tangible assets.
- Catch-up Potential: Historical tendency for silver to follow gold’s lead, often with greater velocity.
How Traders Can Play It
- Monitor the GSR: Watch for the ratio to potentially stretch even further (creating an even more extreme entry signal) or, more likely, start contracting decisively as a trigger for entry.
- Portfolio Rebalancing: If you’re a long-term investor and holding an overweight gold position, consider rotating some capital into silver to capture the potential relative value move.
- Tactical Trade: Establish a direct long position in silver based on this setup.
XAG/USD Trade Ideas
The core thesis is that silver (XAG) is undervalued relative to gold (XAU) and poised for a potential catch-up rally, driven by GSR mean reversion and strong fundamentals.
The following trade ideas are provided solely for educational purposes. Since they don’t include full risk management practices, they are not intended to serve as actual trade recommendations, but merely food for thought to help you generate your own trade idea.
Trade Idea #1: Long XAG/USD on GSR Contraction
- Setup: Wait for the Gold/Silver Ratio (XAU/XAG) to clearly peak and start declining from the extreme ~100 level. A move back below 95 could serve as a trigger.
- Entry: Go long XAG/USD when the GSR shows sustained downward momentum.
- Stop-Loss: Place below a recent key support level on the XAG/USD chart, or if the GSR reverses and starts making new highs again.
- Target: Aim for levels corresponding to a lower GSR (e.g., 80, 70, or the historical mean of 60-50), or target key technical resistance levels on the XAG/USD chart.
- Rationale: Capitalizes directly on the expected mean reversion of the GSR.
Warning: Even if the GSR ratio falls, your trade could still lose money if both metals decline in price…silver just has to drop less than gold, not necessarily rise. Always account for absolute price risk, not just ratio movements.
Trade Idea #2: Long XAG/USD on Technical Breakout/Support Hold
- Setup: Identify key resistance levels on the XAG/USD chart. Alternatively, identify significant support zones during pullbacks.
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Entry:
- Enter long on a confirmed breakout above resistance (e.g., close above on daily/weekly chart).
- Enter long on a bounce off a confirmed support level, provided the broader thesis (high GSR, strong fundamentals) remains intact.
- Stop-Loss: Place below the breakout level (if entering on a breakout) or below the support zone (if buying a dip).
- Target: Previous highs, Fibonacci extension levels, or psychological round numbers. The long-term target can be the previous ATH around $49.95.
- Rationale: Combines the fundamental/relative value thesis with technical timing for entry.
Trade Idea #3: Pairs Trade: Long XAG/USD and Short XAU/USD
- Setup: This trade directly plays the compression of the Gold/Silver Ratio.
- Entry: Simultaneously enter a long position in silver (XAG/USD) and a short position in gold (XAU/USD), ensuring the position sizes are dollar-neutral or ratio-adjusted.
- Stop-Loss: Define a maximum adverse move in the GSR (e.g., if it unexpectedly climbs above 105 or 110).
- Target: Profit target based on the GSR reaching a predetermined lower level (e.g., 80).
- Rationale: Isolates the relative performance between silver and gold, hedging out some directional market risk (though not completely). Suited for traders confident in silver’s outperformance relative to gold.
Risk Management Considerations:
- Volatility: Silver is inherently volatile. Position size accordingly and use stop-losses diligently.
- Timing: While the GSR signals undervaluation, the timing of its reversion is uncertain. Silver could continue to lag, or the ratio could move even higher before turning.
- Market Conditions: A sharp downturn in broader markets or a sudden resolution of geopolitical uncertainty could negatively impact both gold and silver, though the relative value argument might still hold.
Remember to DYOR and conduct your own due diligence (DD) and technical analysis before placing any trades.
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
