Precious Metals Spreads

Contributor Image
Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

Precious metals spreads involve trading the price differences between various precious metals, such as gold, silver, platinum, and palladium.

Traders exploit these spreads to profit from relative price movements rather than the absolute price changes of individual metals.


Key Takeaways – Precious Metals Spreads

  • Precious metals ratios reflect substitution potential between, e.g., gold and silver or between other metals.
  • Market participants often trade these ratios by hedging long positions in one metal with short positions in the other.
  • Long-term averages guide traders on optimal exit points for positions.


Common Precious Metals Spreads

1. Gold-Silver Spread

The gold-silver spread – often called the gold-silver ratio (GSR) – measures the price ratio between gold and silver, commonly referred to as the gold-silver ratio.

  • Trading Strategy – Traders monitor the historical average of the gold-silver ratio. When the ratio deviates significantly from its historical norm, traders might buy the undervalued metal and sell the overvalued one, anticipating a reversion to the mean.
  • Example – If the gold-silver ratio is historically 40:1, but currently at 100:1, traders might buy silver and short gold, expecting the ratio to narrow.

Note that the gold-silver ratio has varied a lot over time.

Accordingly, using the past to inform the present can be difficult.

Historical Averages of Gold-Silver Ratio (GSR)

  • Ancient Average: Roughly 15:1
  • 100-Year Average: Roughly 40:1
  • 20th Century Average: 47:1
  • 21st Century Range: 50:1–70:1 (roughly)
    • Peak: 104.98:1 (2020)
    • Low: 35:1 (2011)

Historical Extremes

  • Ancient Egypt: As low as 2.5:1
  • Medieval Japan: As low as 3:1

Note that these are largely due to a lack of silver in these particular geographies.

Government Fixes of GSR

  • Roman Empire: 12:1
  • 1792: 15:1
  • 1834: 16:1

2. Platinum-Palladium Spread

This spread involves the price difference between platinum and palladium, often influenced by their industrial demand, particularly in the automotive sector for catalytic converters.

  • Trading Strategy – Traders look at supply-demand dynamics and market trends. For instance, if palladium becomes more expensive due to increased automotive demand while platinum remains relatively cheaper, traders might short palladium and buy platinum. Substitution is a variable, though the nuances matter (one metal may be preferred or not preferred for various reasons).
  • Example – When the automotive industry shifts preferences, causing a spike in palladium prices, traders might short palladium futures and go long on platinum futures.

3. Gold-Platinum Spread

This spread tracks the price difference between gold and platinum.

Historically, platinum has traded at a premium to gold, but economic and industrial shifts can invert this relationship.

  • Trading Strategy – Traders exploit deviations from historical norms, considering factors like industrial demand for platinum and safe-haven demand for gold.
  • Example – During periods of economic unknowns, gold prices might surge while platinum prices lag, creating an opportunity to go long platinum and short gold.

There are other niche and ultra-niche spreads that those in the business might pay attention to, such as vanadium vs. titanium, but these are the main ones.


Trading Mechanisms

Let’s look at the ways to trade spreads, figuring usage and benefits.

1. Futures Contracts

  • Usage – Traders use futures contracts on exchanges like COMEX for gold and silver, and NYMEX for platinum and palladium, to establish long and short positions.
  • Benefits – Futures allow for leveraged positions, enhancing potential returns on spread trades.

2. Options

  • Usage – Options provide the flexibility to hedge or speculate on the direction of the spreads without the obligation to hold the underlying asset.
  • Benefits – Options can limit downside risk while offering upside potential.

3. Exchange-Traded Funds (ETFs)

  • Usage – ETFs like SPDR Gold Shares (GLD) or iShares Silver Trust (SLV) offer exposure to precious metals. These enable spread trading through buying and shorting different ETFs.
  • Benefits – ETFs provide liquidity and ease of access without the need to handle physical metals.

4. Physical Metal Trading

  • Usage – For larger institutional trades or specific strategic reasons, traders might engage in physical metal trading, particularly in gold and silver.
  • Benefits – Physical trading ensures direct exposure to the metals. This is useful for long-term hedges or strategic reserves. Carrying costs – e.g., insurance, storage costs – come into consideration.


Key Things to Know

1. Market Liquidity

High liquidity in futures and ETFs markets is important for executing spread trades efficiently without significant price impact.

Sometimes the bid-ask spread preempts you from executing favorable spread trades.

2. Transaction Costs

Transaction costs, including commissions, bid-ask spreads, and storage costs for physical metals, must be factored into the profitability of spread trades.

3. Market Correlations

Understanding the correlation between different precious metals is important.

But correlations aren’t static and shouldn’t be viewed as “gold and silver are 30% correlated” but rather understanding how they fundamentally move.

While gold and silver often move together due to their monetary and investment demand, they also differ by the relative levels of industrial demand (silver is more used for this purposes while gold is closer to a store of value.

Platinum and palladium are more influenced by industrial demand.

4. Macro-Economic Factors

Economic indicators, geopolitical events, and changes in industrial demand can impact precious metal spreads, requiring continuous market monitoring and analysis.


Precious Metals Spread Trading Among Hedge Funds

Spread trading is a favored strategy among hedge funds and institution traders due to its ability to generate returns independently of market movements.

By using spread trading strategies, hedge funds can offer a unique investment product that looks to deliver consistent returns independent of overall market performance.

Key Reasons for Popularity

Market Neutrality

Spread trading strategies are designed to be market-neutral, meaning they try to profit from relative price movements rather than absolute price changes.

  • Benefit – This neutrality helps hedge funds reduce potential exposure to market volatility and also broader economic cycles. In certain cases, this can give a more stable and predictable return profile.


  • Unique Product – By focusing on the price relationships between assets rather than market trends, hedge funds can offer a differentiated product to their limited partners (LPs/investors).
  • Example – A hedge fund might trade the gold-silver spread, benefiting from changes in the price ratio between gold and silver rather than betting on the direction of the precious metals market as a whole. That way they don’t have a correlation to the market.

Risk Management

  • Hedging – Spread trading inherently involves hedging, as positions in one asset are offset by positions in another. This reduces the overall risk to the beta of the instrument itself.
  • Example – In a commodity spread trade, if the price of one commodity rises while the other falls, the gains from the long position can offset the losses from the short position.

Exploiting Inefficiencies

  • Alpha Opportunities – Spread trading allows hedge funds to exploit market inefficiencies and pricing anomalies between related assets.
  • An Example – If there’s a temporary mispricing between two correlated commodities, a hedge fund can simultaneously buy the undervalued commodity and short the overvalued commodity, profiting as the prices converge. This requires specialized know-how, such as knowing the oil market very well to know when to go long and short various blends, like WTI, Brent, and so on. Or understanding metals well enough to know their fundamental pricing relative to what’s currently discounted in markets.


Convergence vs. Divergence Trading in Precious Metals Spreads

A lof of emphasis in spread trading is put on convergence – i.e., these two things are out of whack so let’s bet on them closing. But divergence trading is important, too.

Divergence Spread Trading


  • Divergence spread trading involves taking positions in two related assets with the expectation that their price difference will widen over time.
  • Traders bet that the prices of these assets will move further apart, or “diverge,” from their current relationship.


  • Gold-Platinum Spread – If economic indicators suggest increased industrial demand for platinum (e.g., for catalytic converters in cars) while gold remains stable or declines, a trader might buy platinum and short gold, expecting the price spread to widen.


  • Exploiting Trends – Traders identify fundamental factors or market trends that will likely cause the price divergence.
  • Differing Dynamics – They take advantage of differing supply-demand dynamics or macroeconomic factors affecting the two assets differently. For instance, gold is heavily driven by real interest rates (lower real interest rates increase the appeal of gold) while others are driven more by industrial demand.


  • Market Reversion – The risk that the spread might not widen as expected and could revert to historical norms.
  • Volatility – Increased market volatility can lead to unpredictable spread movements.

Convergence Spread Trading

Convergence spread trading involves taking positions in two related assets with the expectation that their price difference will narrow over time.

Traders anticipate that the prices of these assets will move closer together, or “converge,” to their historical or theoretical relationship.


  • Gold-Silver Ratio – If the gold-silver ratio is historically lower than it is now, a trader might buy silver and short gold, expecting the ratio to revert to its historical norm. The trade profits as the prices of gold and silver converge towards the historical ratio.


  • Reversion to Mean – Traders exploit the tendency of the price spread to revert to historical averages.
  • Market Inefficiencies – They capitalize on temporary mispricings caused by market inefficiencies, economic events, or speculative activities.


  • Timing – The primary risk is timing, as the convergence might take longer than expected.
  • Unexpected Events – Market conditions can change due to unforeseen events, leading to sustained divergence rather than convergence.
  • Past and Future Can Be Different – There might be a valid reason for why the current ratio is what it is, rendering past relationships irrelevant.