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Since gold and silver move in the same direction, can I buy silver if a buy signal emerges in gold?
Khyati Verdhan
It is true that gold and silver move in the same direction. But a buy signal in gold may not imply a buy on silver. A trade signal from gold might lead or lag a signal from silver. Take, for instance, the price movement on the gold daily chart between November 2015 and early January 2016 when the prices bottomed. A clear buy signal came on January 6, 2016, when gold prices surged, breaking above $1,080 per ounce. But, on the contrary, silver extended its consolidation and a confirmed buy signal came only on February 3, 2016, when prices breached $14.5 per ounce.
However, if you are very clear about the strong trend in gold, then you may take a position in silver but with a stop-loss. Remember, you need to strictly adhere to the stop-loss because silver is more volatile than gold. When prices fall, silver tends to fall at a much faster pace than gold. One good indicator to gauge the direction of prices is the gold-silver ratio. It is the ratio obtained by dividing the price of gold by the price of silver. This ratio, in general, moves in the opposite direction of gold and silver prices. That is, when gold and silver prices moves up, the ratio goes down and vice-versa.
If you want to take a position in silver, you can combine the outlook for the ratio and gold prices to arrive at where silver prices may go.
Say, for example, gold price is at $1,200 and silver price at $15. If you foresee gold price moving up to $1,300 and the ratio coming down to 75, then you can project where silver is headed. Silver has to rise from $15 to $17.33 as the gold price moves up to $1,300 which, in turn, will drag the ratio down to 75. In that case you may take a long position in silver with a stop-loss accordingly and book your profit around $17. But if your forecast for either the gold or the ratio goes wrong, then the position taken in silver will also result in a loss.
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