Silver/Gold Ratio

## Silver/Gold Ratio — Full Methodology

### Ratio Calculation

1. **Gold/Silver ratio:** Gold price / Silver price (historical average ~65–70, range ~40–120)

2. **Rolling statistics:** Calculate the 252-day (1-year) mean and standard deviation

3. **Z-score:** (Current ratio − 252-day mean) / 252-day standard deviation

### Entry Criteria

1. **Long Silver / Short Gold:** When Z-score > +1.5 (gold extremely overvalued vs silver → expect silver catch-up)

- Buy SLV, sell GLD in equal dollar amounts

2. **Long Gold / Short Silver:** When Z-score < −1.5 (silver extremely overvalued vs gold → expect gold catch-up)

- Buy GLD, sell SLV in equal dollar amounts

3. Rebalance monthly on the first trading day

### Exit Rules

- **Mean reversion target:** Exit when Z-score returns to ±0.3 (ratio has normalized)

- **Stop loss:** Exit if Z-score reaches ±2.5 (ratio diverging further)

- **Time stop:** Close after 6 months regardless

- **Partial exit:** Take 50% off at Z-score ±0.8

### Position Sizing

- Allocate 10–15% of portfolio to each leg (20–30% total)

- Pairs trade is market-neutral for precious metals direction

- This is a slow-moving strategy — patience is required

### Best Market Conditions

Works best during economic uncertainty when both gold and silver are in demand but at different rates. The ratio tends to spike during crises (gold outperforms) and contract during industrial recoveries (silver catches up). The COVID crash pushed the ratio to 120+ — a textbook entry.

### Backtest Notes

Tested on Gold/Silver ratio monthly data from Jan 2010 to Dec 2024. Very low trade frequency (~2–3 round trips per year. The 252-day lookback window captures multi-year regime shifts.