Trading the Gold/Silver Ratio

[Nitz]

Couldnt find any threads on this in a search...

Anyone trade this way to accumulate? Would be gratefull for any advice/pointers....The general concept is to sell silver when the ratio is low(like now) and buy gold? Then reversed when the ratio gets high?...but what are some of the established levels for these kinds of plays? Things to look out for, etc.

Thanks

[Sparky]

Couldnt find any threads on this in a search...

Anyone trade this way to accumulate? Would be gratefull for any advice/pointers....The general concept is to sell silver when the ratio is low(like now) and buy gold? Then reversed when the ratio gets high?...but what are some of the established levels for these kinds of plays? Things to look out for, etc.

Thanks


Know that this is gambling.

You say sell silver when the ratio is low (like now). How do you know it's low now? A few years ago we had forum members selling gold and buying silver when the ratio was "high" at 50. Then it went to 55. Then 60. Then 65. Then 70.

Plus, every trade comes with a transition cost, because dealers are not going to trade one-for-one. With the ratio at 40:1, they may require 41 or 42 ounces of silver to get an ounce of gold.

It just seems like a lot of work when there are so many other easier ways to gamble on paper while holding your physical. Just my opinion; their are ratio traders here who think otherwise.

[Nitz]

i understand the transaction cost, but i would only do this at extremes and not often...i wouldnt be looking to actively do this...but if i chose a wide enough spread...say, buy/hold silver until 35 to 1...then trade for gold...then hold and acumulate gold until say 60 to 1...wouldnt a spread that far ensure that it would be profitable as far as accumulating extra ounces?

[tater]

I too am looking towards a metal swap. Not all my silver for gold, more like 1/3 of my position.
If the ratio drops further and further and never returns to these levels what is the worse thing
that could happen? I've got too much gold?

Sparky, where do you think the ratio is heading and do you ever see it reversing? Thanks in advance.

[mightymanx]

I have done it on more than one occasion my spread is 20 and I factor in a fee of 5.

Yes it works but your relation with your particular dealer is going to be the key to the sucess and finding one that wants to play might take lots of time.

[Sparky]

Nitz, I can understand the logic if you are only making moves on big swings. I guess I just wouldn't want to bother. Also, since I'm big on PM diversity, I would want to make sure I held a minimum amount of each at any given time, so I certainly wouldn't be doing it if it meant converting my entire holdings of one metal for the other.

Tater, I'm no expert or fan of the G:S ratio, but I'll offer my prediction on anything! I expect gold and silver to have a healthy correction within the next 4 months, and since silver gets beat up a lot harder than gold during corrections, I think the ratio will head back up as a result.

[osoab]

Interesting article on the subject. Just partial quotes. The article is pretty long.

Using the Gold to Silver Ratio to Determine Precious Metals' Outlook (http://www.silverbearcafe.com/private/03.11/ratio.html)


The gold/silver ratio at 40.2 is also lower than the 46 at the start of the February 2011 -- typically, the lower the ratio, the higher the silver price and vice versa. Silver is a more speculative play that is tied to more positive economic correlation. That is, Silver is much more correlated to positive economic activity (where we have sustainable growth in commodities as fuel for productive economic endeavors). This optimism typically occurs during times of leverage and liquidity. Gold is much more of safe haven precious metal. Its moves are a lot less spiky than Silver's.

Gold is a safe haven move in times of crisis. Investors often go to physical gold or to funds that have claims on physical gold. Silver, however, is a different animal. Silver is another monetary metal, yet it has a very wide range of industrial uses. As such it straddles the line between a currency and a commodity.


Silver will vastly outperform gold, and we expect the GSR to plummet to 35 or even to 30 or less. At the least I think Silver will lead the next phase of the cycle and outperform Gold. So, Silver will outperform for coming month or so and Gold will outperform after that. Silver will outperform again in 2012. If there are no manifest inflation and social unrest then Gold (at US$1435) will be flat (as risks may still linger) and we are bullish Silver (at US$35). However, if the inflation increases faster than expected and results in the social unrest in the parts of the emerging markets, Gold will vastly outperform Silver.

If the Middle East crisis is not resolved quickly or/and rising crude oil price triggers a new recession, Gold may be a safe haven in view of few policy choices and the GSR could challenge the 60 level again. In that case, gold will probably be putting on another +15% move at that time with a flat/decline in Silver (as demand for monetary metal heightens, expect Silver to behave like a commodity). However, even in that case, ratio may reverse by the end of end of 2011.


Good Value Or Not?:

From the chart we can see that the gold:silver ratio has provided a reliable buy signal for gold every time it has touched the 40:1 ratio since 1997. The 1997 signal was premature but you weren't buying gold too far off its historic lows and all four signals since then have marked excellent buy points. Since we're currently seeing gold: silver ratio at the 40:1 level, history suggests that 40:1 level to pinpoint a good buying point for gold.

Interestingly, 200 days moving averages gold to silver ratio is 42. Using silver as a 'base': If silver were to fall to the $23.7 level (its 200-week moving average) then 60 X 23.71 = $1625/oz gold.


Using gold as a 'base'

If gold were to fall to the $1370 level (its 50-week moving average) then we're looking at $27 for silver from mean reverting level of 55. If gold falls to US$1320 level, and GSR ratio stays around 32, which is its near term target, the silver price may be at US$41.25 per ounce - which seems more realistic if crude oil price does not break the ceiling and inflation does not rear its head with accompanying social unrest.

However, if inflation starts rising above expectations and there are near term interest rate hikes whereas social unrest is contained, gold may plummet to $1050 (its 200 week moving average). Then 1050/32 gives us $32.20 for silver. In the case where there is widespread social unrest and rising commodity prices bring on another recession, the gold price may rise to US$1700 per ounce. In that case, the GSR may be higher towards the level of 50, which implies a silver price of US$34. I personally don't think we'll see a gold price that low in 2011. Again, this implies that silver won't correct much at all even as the gold price takes a whack. However, the "magic" gold to silver level of 55 does give us some kind of objective number to consider when buying either metal. I suggest keeping this ratio as well as the metals' 50/200 week moving averages in mind for future buy/sell decisions.

[Rebel Yarr]

I did a little at 50:1 - if you look at the historic silver:gold ratio....you will see that we have not held under that for any length of time....so, I'd say it is a good trade to make - take some at 40 or under - then some more at/under 30.

As Sparky says...you eat it both ways. Unless you do a local transfer via craigs or whatever...you will eat it big time at the dealer....sell and buy...ouch.

I did it once at the dealer to see how painful it would be - and yes it was painful. I don't regret doing it...but I will save the rest for 25 and under.

Don't plan on making a whole lot of free ounces trying to time this thing - we are in crazy uncharted territory.and we very well could see that ratio go under 20.

[Mouse]

You can play the swap game on paper. The only reason I can see making sense doing it physical would be if you have too much weight in silver and want to lighten up your boat some.

Gold ratio is just selling silver and buying gold. For instance, I sell a silver contract current month and buy a gold contract for three months from now (forget the forward curve, I am just assuming current spot prices):

Contract Volume Spot Position
Comex Silver -5000 $37 -$185,000
Comex Gold 100 $1,430 $143,000

Net Position -$42,000

That sucks. I have a mismatch that results in a short risk of 42k.

So I can add a mini gold contract and get this:

Contract Volume Spot Position
Comex Silver -5000 $37 -$185,000
Comex Gold 100 $1,430 $143,000
E-mini Gold 33.3 $1,430 $47,619

Net Position $5,619

That's a pretty flat book. That will achieve your ratio deal without paying a bunch of premium. And then you can play around with options and other goodies if you want to further hedge. You aren't likely to get your local coin shop to write put options on your gold position.

You can do the same thing in the evil ETF world. Who knows if you will ever get paid. Assuming you get paid out of the position, you can then go buy whatever your profits were at the local dealer.

It's gambling.

[tater]

I've been meaning to post on my metal swap experience. I got really busy but here it is. Couple of weeks ago I head out to a coin show a couple of hrs from Taterville. Place my ag in a bag in the trunk and it's off to the coin show. Lot's of signs at the tables" we buy silver" but not at the prices I was looking for. One fella says "you need to talk to so and so".

Long story short; the ratio at the time was 40.25 and I made my swap at 41.74 a difference of 1.49
If it continues to drop another 10 pts or there abouts, I'll make another swap.