Gold/Silver Ratio Is High, But It's Been Higher

I was looking at the ratio of the price of gold relative to the price of silver last week.

Serendipitously, Bespoke offered up a chart of the gold/silver ratio a few days ago. This is the chart.

click to enlarge

I find this chart intriguing. Going long silver and shorting gold looks like an interesting trade. The gold/silver ratio is at a decade high.

However, the chart only goes back 10 years. Prior to 1998, the the gold/silver ratio was even higher.

This is the ratio since 1984.

The current ratio is 77. Since 1998, the gold/silver ratio has averaged 60. Since 1984, it has averaged 66. The ratio hit 99.7 in February 1991. So the gold/silver ratio is high, but it has gone higher in the past.

I thought about putting this trade on but have opted not to so far. Buying silver and shorting gold is essentially a beta play on the economy since silver is used in industrial production more so than gold. If the economy improves and investors regain confidence in asset markets, this ratio will close. You can get the same beta exposure to the economy by buying stocks.

Thus, though I find buying silver and shorting gold an intriguing arbitrage trade, I have yet to put it on because I do not know any other reason to think it will close other than an eventual return of confidence to the asset markets.

Comments

[Rakesh V:]

Ya but you miss one point which is very important and matter to discuss , why gold to short and why silver to long............. so my answer is simple is DELEVERAGING PROCESS ........ DO you know guys what is impact of deleveraging on gold and silver ..........deleveraging is process where higher prices are opprtunity for the funds and inverstors(Those people who bought at US$690 to US$600 level. now what is meaning of this the reason is simple that the people who forgot to book profit at higer prices and if prices are under their value can make profit at higer prices.... but they wont book profit in silver since silver is silver poor, rich everyone has reason to smile on silver.......


So long term i see Silver between US$14 to US$17 , in Rs.terms it can touch at Rs.21200/Rs/24000/Rs.2... are my targetsssssssss.......... so guys see you at that prices.

Jan 08 06:18 AM

[Gold Barron:]

With all of the future inflation, I expect gold and silver to soar to new highs this year.

Jan 08 12:10 PM

[jetsby10:]

Why not just go long silver and sell gold. I wouldn't be shorting gold right now.

Jan 08 03:00 PM

[User 30121:]

Rakesh,

I can't follow your line of thinking. Can you please restate your case?

Jan 08 04:09 PM

[Nikhil:]

"deleveraging is process where higher prices are opprtunity for the funds and inverstors" ??? can you explain this


On Jan 08 06:18 AM Rakesh Varasia(Sr.Research Analyst) wrote:

> Ya but you miss one point which is very important and matter to discuss
> , why gold to short and why silver to long............. so my answer
> is simple is DELEVERAGING PROCESS ........ DO you know guys what
> is impact of deleveraging on gold and silver ..........deleveraging
> is process where higher prices are opprtunity for the funds and inverstors(Those
> people who bought at US$690 to US$600 level. now what is meaning
> of this the reason is simple that the people who forgot to book profit
> at higer prices and if prices are under their value can make profit
> at higer prices.... but they wont book profit in silver since silver
> is silver poor, rich everyone has reason to smile on silver.......
>
>
>
> So long term i see Silver between US$14 to US$17 , in Rs.terms it
> can touch at Rs.21200/Rs/24000/Rs.2... are my targetsssssssss..........
> so guys see you at that prices.

Jan 08 04:14 PM

[User 379271:]

with USA so much debts, silver and gold will substantiate lots of currency once China and the world loses 70% confidence with USA's verbal promise of debt delivery... USA gov is good at lips services due to its superior arm power, oil control, "buying power"...

within Mar and within september. New HIGH...

Mar 19 12:33 PM