Ratios: What Are They?
In finance, a ratio is the mathematical relationship between the prices or values of two different assets. Essentially, a ratio shows how many units of one asset are needed to purchase a single unit of another asset. When plotted over the long term, these figures can highlight relationships, relative performance, or potential mispricings across various asset classes.
Ratios are particularly useful because they strip away the informational noise created by inflation, central bank money printing, and short-term currency fluctuations. By pricing one asset relative to another, a trader can determine whether something is truly cheap or expensive.
For example, gold ratios can reveal how gold performs against silver, oil, equities, and even real estate without the distortion from exchange rates or monetary policy. Indeed, pricing currencies or other financial assets specifically against gold makes perfect sense. As a neutral, tangible asset known for preserving its value during high-inflation times, gold provides a less biased approach to viewing the global financial market.
Kar Yong Ang, a financial market analyst at Elev8 broker, explains: ‘In trading, ratios help identify trends, divergences, and mean-reversion opportunities. When trading via CFDs [Contracts for Difference], understanding these ratios opens up opportunities for statistical arbitrage. Because a CFD allows investors to go both long and short without owning the underlying physical asset, traders can trade the ratio itself, which is a very flexible tool in volatile markets’.
Gold Ratios
The Gold-to-Silver Ratio
The gold-to-silver ratio (GSR) is the oldest exchange rate in human history. It existed long before gold futures contracts began trading on the COMEX exchange in 1982. GSR is calculated by dividing the market price of gold by the market price of silver, showing how many ounces of silver are needed to buy one ounce of gold.
While both (gold and silver) are precious metals and share jewellery and investment demand, their underlying fundamentals differ significantly. Gold maintains an intensive monetary function, favoured heavily by central banks, whereas silver is heavily tied to the industrial cycle.
