Question

How to calculate gold silver correlation?

Answer 1

How to use price correlation to predict asset prices

Tanvi Varma/Money Today | Edition:January 2013

When equity markets are rising, you should invest less in debt, as the two have a negative correlation. When equity is doing well, debt returns usually fall, and when debt is doing well, equity underperforms.

inShare



When equity markets are rising, you should invest less in debt, as the two have a negative correlation. When equity is doing well, debt returns usually fall, and when debt is doing well, equity underperforms.

For instance, between 2003 and 2007, benchmark stock indices gave returns in high double digits while returns from bonds were in low single digits. In 2008, when the stock markets were struck by the global financial turmoil, debt did exceptionally well.

Debt and equity are not the only assets that are related. Let's look at other combinations where a price movement in one asset can be used to predict the direction of the other.

GOLD-SILVER RATIO

The movement of gold and silverprices has always been related. When one rises, so does the other. In fact, both have returned around 16% a year on a compounded basis since 2000.

The link is captured by the gold to silver ratio, which is arrived at by dividing the price of gold by the price of silver. "The ratio represents the amount of silver needed to buy an ounce of gold," says Naveen Mathur, associate director, commodities and currencies, Angel Broking.

On December 6, the ratio was 52, which meant that an ounce of gold was worth 52 ounces of silver that day (gold was at $1,692 per ounce and silver at $33).

It is said that during the Roman times, the ratio was 12. In 1792, the United States fixed the ratio at 15, which meant that one ounce of gold was worth 15 ounces of silver. It rose for years after that, touching a high of 94 in the 1990s (gold at $383 per ounce and silver at $4 per ounce). After the 1990s, the ratio has been falling and averaged 59 in the 2000s.