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Gold / Silver Ratio

Hey Joe! Have you ever traded the Gold/Silver Ratio? How do you go about doing it?

I think I traded the ratio a couple of times. It's not something I pay a lot of attention to. Here's some background about this ratio:

According to a Mocatta Metals Corporation article, as of April 1980, when the price ratio of one ounce of gold to one ounce of sliver approaches 40:1 gold should be sold and silver bought. Conversely, if the ratio narrows to 20:1 then silver has advanced too fast and should be sold. Further, "'When Columbus discovered America ten ounces of silver were equal to one of gold...'" (How odd! Columbus discovered what is now San Salvador in the Bahamas. He never set foot on what is now the United States.)

Although the ratio changes over time, the Hard Asset Investor reported in 2014 that the 15-year average ratio was close to 60 and exceeded 80 on two occasions since 2000.

On July 5, 2019, the ratio reached as high as 95.11 before quickly tumbling to 85.62 by July 24. See the chart below.

In the chart above we see the ratio at 83.38 and heading lower, it crossed below the upward sloping trendline, USTL in early July then rebounded to back up to test the trendline, then fell off the shelf last August 27, 2019, when gold stalled while silver continued higher.

Applying the 15-year average of 60 to continuous contract prices above, for gold at 1529.40 silver equals 25.49. With silver at 18.34, there could be more upside, but since both can rise or fall independently, the ratio low made December, 2018, just below 82 will be important to watch.

Strategy: When silver is moving higher on a percentage basis, you can buy silver and sell gold. You can do this by using the futures markets to create a spread, or spread Exchange Traded Funds. I don't recommend using physical metals, because you need the flexibility for making a fast change in position.

You can find some interesting ratio charts at the following URL: https://goldprice.org/gold-silver-ratio.html

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Tuesday, 22 June 2021

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