Trading the Gold to Silver Ratio

by: Kurtis Hemmerling

Silver bulls will often point to the gold to silver ratio as a potential upside for Ag. Here are two arguments made:

  1. The historical monetary relationship between gold and silver currency in the 1800’s was around 15:1.
  2. Using the data found at as a rough guide, the ratio is 25:1 but I have come across some sites have the estimates closer to 16.

With gold prices hovering around $1,350 – does this imply an upside silver price of $52 - $90 per ounce?
Historical Gold Silver Ratio

Silver Prices Become Law

If the abolishment of bi-metalism continues, it would be difficult for me to justify and immediate return to the 15:1 ratio. However, it seems that some House bills are being submitted that call for a return to the ‘gold standard’ in response to recent quantitative easing inflation and perceived mismanagement of the dollar by the Federal Reserve. There are many variations of this game, but if it became necessary for banks and the government to at least increase the proportion of gold in their vaults to back to the currency, this would create demand.

  • If gold went above $2,500 and the ratio was 47:1, the price of silver per ounce would be $53. Some gold bugs forecast $5,000 and upwards. Just type it into your search engine and you’ll see.
  • But to lower the ratio sustainably, the silver standard or bi-metalism would need to come back. Then we might see a government-induced push back to the 15:1 ratio. If gold were to trade at $2,500 with a 15:1 ratio then silver would be $167 per ounce. Of course, gold could be set at a much lower rate too.

I simply do not see enough support for the idea that the government is pushing for the ancient system of gold and silver coinage with a standard rate set by the government. Perhaps a more profitable play at this point is to look at short term trading thus taking advantage of the changing ratio.

Short Term Trading of the Gold Silver Ratio

Keep in mind that changes the gold silver ratio can come from gold dropping in value and silver holding its own (which is not what we want), or silver moving up against the price of gold in relative value (which is what we do want).

I have found it useful for the long term 150 period moving average on a multi-year gold and silver ratio chart (weekly bars). Looking at a long-term chart back to 1975, there appears to be support around the mid-40’s ratio, although it has dipped below 20 briefly in 1980 when the silver market was cornered. We are in a strong downtrend for a lowering gold to price ratio, but support is nearby.
Short term Gold Silver Ratio by Stockcharts

My personal opinion is that they ratio may have trouble going much lower for any length of time, unless some governmental policy is changed.

Based on previous support levels you could decide to go long on gold and short on silver in equal dollar amounts to remove currency or dollar risk and simply play the changing relative values between the precious metals. This is if you feel the gold to silver ratio will increase again.

If you think that silver will rocket in relation to gold, go long on silver and short on gold in equivalent amounts to play the gold to silver ratio only. You can do this by entering a specific amount of money equally into both gold and silver ETFs, one long and one short depending on your sentiment.

  • Some gold-based ETFs that you may want to investigate further are GLD, DGL, UBG, GDX. Some of these are involved in the physical price of gold, such as GLD(which is preferable), others are not.
  • Some silver based ETFs are SLV, USV, SLVR, and leveraged bull AGQ or leveraged bear ZSL.

It may well be that we see the 15:1 ratio return, but I just don't see that yet. That is simply my humble opinion. I think a better way to play is to forecast the long term silver upside rather than merely calculating the relative relationship between precious metals. I'd be very interested to hear your politely put forth opinions on how you see the issue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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