Silver and Other Precious Metals

What you will learn

• Why silver is usually more volatile than gold
• How industrial demand affects silver, platinum and palladium
• How to calculate and read the gold/silver ratio
• Why the ratio is a descriptive measure and not a trading signal

Explanation

Gold is not the only precious metal. Silver, platinum and palladium are also traded, but they behave differently.

Silver

Silver has a double role. It is partly an investment metal, like gold, and partly an industrial metal, used for example in electronics and solar panels. This means silver can react both to the same forces as gold and to the state of industry and the economy.

Silver is usually more volatile than gold. Volatility describes how strongly and how often a price moves up and down. The silver market is smaller, so the same amount of buying or selling can move the price more. Larger swings mean higher potential gains and higher potential losses.

Platinum and palladium

Platinum and palladium are used heavily in industry, for example in catalytic converters for cars. Their prices depend strongly on car production, technology changes and supply from a small number of producing countries. Their markets are smaller still, and prices can move sharply.

The gold/silver ratio

The gold/silver ratio is the gold price divided by the silver price. It tells you how many ounces of silver you could buy with one ounce of gold. If the ratio rises, gold has become relatively more expensive compared with silver; if it falls, silver has gained relative to gold.

Some people say the ratio is "too high" or "too low" compared with its past and use this as a signal. Be careful. The ratio describes a relationship today. There is no fixed "correct" level, and the ratio can stay high or low for years. Use it to describe relative value, not as a reason to trade on its own.

A note on VAT

In the EU, investment gold that meets certain conditions is exempt from VAT (lesson 10). Silver, platinum and palladium generally do not get this exemption, so a private buyer usually pays VAT on top. Check the current rules with your dealer.

Worked example

Hypothetical example: All prices are invented round numbers.

Ratio: gold = $2,400 per ounce and silver = $30 per ounce. Ratio = $2,400 ÷ $30 = 80. One ounce of gold buys 80 ounces of silver. If silver then falls to $24 while gold is unchanged, the ratio becomes $2,400 ÷ $24 = 100.

Volatility: Hannah holds €5,000 in gold and €5,000 in silver. On a typical day, assume gold moves about 1% and silver about 2%.

1. Typical daily move in gold: €5,000 × 1% = €50.
2. Typical daily move in silver: €5,000 × 2% = €100.
3. The same amount in silver gives about twice the daily swing in this example.

Costs, VAT and taxes are excluded. Real volatility changes over time.

Common mistake

Practice activity

Hypothetical: gold is $2,000 and silver is $25. (a) Calculate the gold/silver ratio. (b) Silver rises to $32 while gold rises to $2,240. Calculate the new ratio and say whether silver did better or worse than gold.

Limitations: The ratio says nothing about whether either metal is cheap or expensive in absolute terms.

Key takeaways

• Silver is both an investment and an industrial metal and is usually more volatile than gold.
• Platinum and palladium depend heavily on industrial demand, especially from car production.
• Gold/silver ratio = gold price ÷ silver price; it describes relative value.
• The ratio has no fixed correct level and is not a trading signal on its own.

Next step

Next, you will learn how traders plan a gold trade using trend, levels, volatility and the news calendar.