It is Time to Trade the Gold:Silver Ratio

December 6, 2010 12:27 pm Published by
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Seeking a 15 to 30 percent return with no cash outlay

By: John Fisher

The upward trend in the metals has many investors owning both.  But, there’s more you can do with gold and silver bullion than just buy and hold. You can also periodically trade, or “swap”, one for the other.  To do so successfully, you first need to understand the gold:silver ratio.

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

  • The historical ratio is 16:1 (it has taken 16 ounces of silver to buy 1 ounce of gold)
  • For the last 100 years, the ratio has been 30:1
  • In the last 12 years, the ratio has held closer to 60:1
  • In just the past  5 years, the ratio has fluctuated from 45 to 85
  • As of December 3, 2010, the gold:silver ratio was sitting slightly above 48:1

How do we take advantage of this fluctuation?

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

NEXT – we buy the form of silver or gold that offers the possibility of greater profits. During periods of high demand, investors will often bid up the premium on certain items 20 to 40% or more of their underlying metal value. At that point, we can swap those high premium items for others with lower premiums – capturing much of the difference, and converting that difference into extra ounces of metal.

LAST – we act when the ratio reaches tops and bottoms. When the ratio is high, we swap gold for silver. Then when the ratio drops, we swap silver back into gold.  Said another way, we swap silver for gold when silver has appreciated faster than gold.  Then, we swap gold back into silver when silver becomes “cheap” relative to gold.  Every time we go through this cycle – gold to silver and back to gold – we increase our ounces.  That’s the whole objective.  For example:

  • Suppose you had one ounce of gold, and the gold:silver ratio rose to 80:1.  You would swap your one ounce of gold for 80 ounces of silver.
  • When the ratio contracted to 40:1, you would swap your 80 ounces of silver back for 2 ounces of gold, doubling the number of ounces you hold.

Plus, utilizing this technique does not require any additional monetary outlay.  Taking advantage of this ratio strategy beats the alternative – sitting still and waiting for the price to rise.

CAUTIONS

Taxes – If you realize a profit from the transaction, you may owe tax on the gain.  We do not offer tax advice.  Please consult your tax specialist.

Market risk- I do not determine swapping price points independently.  Rather, I lean heavily on others in the industry who first taught me the technique more than a decade ago.

The market may not cooperate.  The challenge is correctly identifying the swapping points based on the relative valuations between the metals. The ratio might move much higher or lower than our target.  We would then need to wait longer for the ratio to readjust itself.  This is the essential risk to those trading the ratio.

Costs – Transaction costs such as shipping, the bid-ask price spread and commission can reach 8%, although they should be lower. You need to hold the trade long enough to recoup the transaction costs.  Transaction costs associated with trading physical metals is higher than trading ETF’s, futures or other paper instruments.  In order to keep your costs low, we charge our normal commission on ONE side of the trade only, the side you swap out of.  Most dealers will charge commission on BOTH the buy and sell side of the trade. Don’t settle for a lesser deal.

BENEFITS

More Ounces at no cost – The Gold:Silver ratio trading strategy takes an investment (gold and silver) that pays no dividends or interest and causes them to grow by increasing the number of ounces you hold – without any additional cash outlay.  Between now and the end of the bull market you should conservatively expect to double your ounces utilizing this strategy.

CAVEAT EMPTOR

When I first started to buy metals, my mentor used to remind me frequently that he was not a prophet.  In that same vein, if I am wrong about the gold:silver ratio, it will cost you money. You’ll buy silver instead of gold and the gold will outpace the silver, or vice versa.

I don’t think that will happen.  I have successfully deployed this strategy numerous times.  Sometimes the timeframe between swaps is relatively short – maybe only a few months.   Other times it has taken two years or longer.

All Things Considered – John’s Commentary

  • The charts below clearly illustrate that the ratio has vacillated between 45 and 80 for the last decade.
  • I am recommending swapping silver for gold when the gold:silver ratio drops to 48 or less.If the market follows the pattern of the last two ratio bottoms, about two to four months after this silver-to-gold swap we should have the opportunity to swap that gold back into silver, capturing that gain in additional ounces of silver.
  • Because there are commissions and other transaction costs, you will not realize exactly the same ratio as the spot ratio, but a few points higher.
  • Those individuals who swapped the last time, gold into silver, did so at a ratio of 65:1 or higher.  If we swap from silver into gold at 48:1 or better, we should realize a gross gain in ounces of approximately about 34%, less transaction costs.  Your own results will depend on the ratio when you acquired your silver, and the ratio when you swap out.  Bear in mind, this is a good trade only if we justify our transaction costs.
  • The swapping strategy works for both small and large investors as long as you are willing to swap (150) ounces of silver or more.  We will swap into the lowest cost, most readily available, most liquid gold coins – whatever offers you the most gold for your silver.
  • We will charge our normal commission on ONE side of the trade only, the side you swap out of.  In this case that will be the silver.  On the gold that you receive in return, we will not charge any commission.  You will purchase the gold at the price we purchase from our wholesale distributors.
  • This is not a solicitation, only a strategy.  Please do your own due diligence and make your own investment decision.
  • We are still ultimately favoring silver over gold as we remain convinced that the ratio will reach 16:1 (or better) by the end of this bull market.

The gold:silver swapping opportunity is presenting itself again.  If you are interested in learning more on how you might increase your metal holdings by 15 to 30% or more, with no cash outlay, please contact us immediately.  The window of opportunity is very narrow.

2 Year Gold:Silver Ratio Chart

5 Year Gold:Silver Ratio Chart

10 Year Gold:Silver Ratio Chart

20 Year Gold:Silver Ratio Chart

36 Year Gold:Silver Ratio Chart