People trade the gold-silver ratio when they want to increase the quantity of gold and silver that they own without directly purchasing it. Historically, governments, going back to the Roman Empire, set the ratio. The gold-silver ratio is the number of ounces of silver that equals one ounce of gold. Governments no longer control the ratio, but rather it fluctuates on the open market. The gold-silver ratio reflects the current selling price of both of these precious metals.
Choose whether your first investment will be gold or silver. If you have limited funds, then silver bullion is significantly less expensive. Bullion is a precious metal with a stamped weight and purity, such as 99.9 percent pure gold or silver bars.
Monitor the gold-silver ratio. The calculation is easy, as you simply divide the price of gold by the price of silver. For example, if gold is $1,500 per ounce and silver is $25 per ounce, then 1,500 divided by 25 is 60. The gold-silver ratio is 60:1, meaning you would have to trade 60 oz. of silver for 1 oz. of gold.
Hold your gold or silver bullion until the ratio changes in your favor. For example, if you purchased silver bullion when the ratio was 60:1, and the ratio goes down to 40:1, your silver has increased in value as it now only takes 40 oz. of silver to equal 1 oz. of gold.
Choose a trading point. Research the additional fees involved with trading, including what you paid for your first purchase and the shipping and fees for your next trade. Include this amount when you decide how much the gold-silver ratio must change before you make a trade.
Trade your silver bullion for gold when the ratio goes down to your trading point. Trade the gold bullion for silver when the ratio increases. The object is to increase your physical holdings of gold and silver, rather than sell either of them for profit. Possession of gold and silver is a hedge against market crashes and economic downturns.
Diane Perez is a writer who contributes to various websites, specializing in gardening and business topics, and creates sales copy for private clients. Perez holds a Bachelor of Science in education from the University of Miami.