Understand the gold silver ratio and how to trade

Swapping the gold / silver ratio: pursuing a 15% to 35% return with no cash outlay

The bullish trend in metals causes many investors to own both. But, there is more you can do with gold and silver bullion than simply buying and holding. You can also periodically trade, or “trade”, one for the other. To do this successfully, you must first understand the gold / silver ratio.

The gold / silver ratio tells you how many ounces of silver it would take to buy one ounce of gold at a specific time. If you examine the prices of gold and silver dating back 4,000 years, you will find:

• The historical ratio is 16: 1 (it took 16 ounces of silver to buy 1 ounce of gold)
• For the past 100 years, the ratio has been 30: 1
• In the last 12 years, the ratio has approached 60: 1
• In the last 5 years alone, the proportion has fluctuated from the low 40s to almost 100
• As of March 1, 2011, the gold / silver ratio was slightly below 40: 1.

How do we take advantage of this fluctuation?

• First – we time our purchases based on the proportion. When the ratio is relatively high, we favor silver in new purchases. When the ratio is relatively low, we favor gold.

• Latest – We act when the relationship reaches maximum and minimum. When the ratio is high, we exchange gold for silver. Then, when the ratio drops, we trade silver for gold. In other words, we exchange silver for gold when silver has appreciated faster than gold. Then we trade gold for silver when silver becomes “cheap” relative to gold. Every time we go through this cycle, from gold to silver and back to gold, we increase our ounces. That is the whole goal. For instance:

  • Suppose you have one ounce of gold and the gold / silver ratio is raised to 80: 1. You would trade your ounce of gold for 80 ounces of silver.
  • When the ratio was reduced to 40: 1, you would trade your 80 ounces of silver for 2 ounces of gold, doubling the number of ounces you have.

• next – We buy the silver or gold form that offers the possibility of higher profits. During periods of high demand, investors will often increase the premium on certain items by 20% to 40% or more of their underlying value. At that point, we can trade the high-premium items for lower-premium items, capturing much of the difference and converting that difference into additional ounces of metal.

In addition, using this technique does not require any additional monetary outlay. Taking advantage of this relationship strategy is better than the alternative: standing still waiting for the price to rise.

DEPOSITS

• Taxes – If you make a profit from the transaction, you may owe tax on the profit. We do not offer tax advice. Consult your tax specialist.

• Market risk – I do not determine the exchange price points independently. Rather, I rely heavily on others in the industry who have also been practicing the technique for decades. The market may not cooperate. The challenge is to correctly identify the trading points based on the relative valuations between the metals. The ratio could move much higher or lower than our target. Then we would have to wait longer for the relationship to readjust. This is the essential risk for those dealing with the relationship.

• Costs – Transaction costs such as shipping, bid-ask price differential, and commission can go up to 8%, although they should be lower. We will have to maintain the operation long enough to recover the transaction costs. The transaction costs associated with trading physical metals are higher than trading ETFs, futures, or other paper instruments. To keep your costs low, we charge only half of our normal commission for an exchange transaction. Many others will charge a full commission on both the purchase and the sale. Be careful.

BENEFITS

• More ounces at no cost – The Gold / Silver trading strategy requires an investment that would otherwise be stagnant and creates growth by increasing the number of ounces you have, without additional cash outlays. Between now and the end of the bull market, you should conservatively expect to double your ounces using this strategy.

What you need to know

• When I started buying metals almost 20 years ago, my mentor frequently reminded me that I was not a prophet. Along the same lines, if I am wrong about the gold / silver ratio, it will cost you money. You will buy silver instead of gold and gold will outperform silver, or vice versa. I don’t think that will happen. However, if you do, it will be temporary. I have successfully implemented this strategy numerous times. Sometimes the time period between exchanges is relatively short, maybe only a few months. Other times it has taken two years or more.

• I recommend exchanging silver for gold when the gold / silver ratio drops to 48 or less. Consider changing more if the ratio drops more. We will then look for the opportunity to exchange that gold back for silver, capturing that gain in additional ounces of silver.

• Because there are commissions and other transaction costs, you will not get exactly the same ratio as the spot ratio.

• The exchange strategy works for both small and large investors, as long as you are willing to trade (150) ounces of silver or more. We will trade for the most liquid, lowest cost, and most readily available gold coins, whichever gives you the most gold for your silver.

• This is not a request, just a strategy. Do your own due diligence and make your own investment decision.

• Ultimately, I continue to favor silver over gold, as I remain convinced that the ratio will reach 16: 1 (or less) at the top of this bull market.

Internal cleaning

• It is impossible to exchange an exact amount of one metal for the exact amount of another. For example, an ounce of gold can buy 50.17 ounces of silver, but never exactly 50 ounces. I do my best to shift as close to level as possible. The residual will be settled in cash. You may owe a small amount or you may be owed a small amount. I try to keep these amounts under $ 100.

The gold / silver swap opportunity occurs intermittently. If you are interested in learning more about how you could increase your metal stock by 15% to 35% or more, with no cash outlay, please contact us. The window of opportunity is very narrow.