Analysis Of Gold And Silver Price

Ratio between gold and silver is the ratio of the price of gold and silver in the same period of time. Volatility of this Ratio reflects the change of relationship between gold and silver. This paper is aimed to figure out the importance of ratio between gold and silver, as well as the arbitrage scenario when legal ratio is different from market ratio, by checking the subtle bimetallism relationship between gold and silver. A review of the historical background of the study about ratio between gold and silver and of investment behaviors based on this ratio proved both the historical and realistic value of the topic. In this paper, empirical research on the prices of gold and silver revealed the long-term, stable co-integration relationship between gold and silver. And the result helped us infer that ratio between gold and silver may comply with the law of mean reversion. An investment strategy based on the above study was then carried out.Empirical model was designed according to the affecting factors of volatility of the ratio between gold and silver. OLS showed that both silver and gold are very sensitive to the monetary policy of the United States because of their financial properties. And since silver shares a deeper market depth, ratio between gold and silver is negatively affected by M1. Secondly, this paper revealed that real economy negatively affects the ratio between gold and silver, while the total silver stock draws a positive impact due to the stronger commodity property of silver. In addition, the ratio reflected close relationship between volume and price since it is influenced by the trading volume of gold and silver. Furthermore, a simple investment strategy was designed and recent data was used to verify the validity of this trading strategy. Result showed that there would be a chance to get a positive return with strict compliance of investment threshold set and flexible application of investment strategy. Finally, the paper gave out the trading strategy based on the results of empirical model and trading practices model. The paper concluded that investors could obtain greater gains and avoid large risks if they adjust the anticipation of mean regression line according to the change of monetary policy, the running of the real economy and the variation of total silver stock.