The Gold/Silver Ratio Strategy

hchcoin · October 22, 2014 9:40AM

Rawteam1 got me thinking about the gold to silver ratio strategy based on his post in another thread. In a nutshell, here is the strategy that I know:

Buy gold with silver, when gold is cheap. Buy silver with gold, when silver is cheap.

For example, right now the gold to silver ratio is around 70:1. In May of 2011 the ratio was 40:1. What does this mean? In May of 2011, we should have been swapping our silver for gold. For example, we could have swapped 40 ounces of silver for one ounce of gold. Now that the ratio is 70:1. We could swap our ounce of gold for 70 ounces of silver.

In a nutshell,

To get started, buy silver when the ratio is high and buy gold when the ratio is low.

After you have created a position,

When the ratio is high, swap gold for silver
When the ratio is low, swap silver for gold

If you do this, you will increase your stack! What does everyone think?

My next question is, what does everyone think is a high and low ratio for the strategy to work?

derryb · October 22, 2014 1:41PM

20 yr. GSR chart reveals an avg. peak of 80:1 before a sustained downturn and an avg. low of 40:1 before a sustained upturn. I consider data before then to be irrelevent because of particular influences/variables such as ending the gold standard, Hunt Brothers anomaly, etc.

Current trend is upward from a low of 32:1 in Feb 2011. If I had to call the next peak it would be at 83:1.

Keep in mind that GSR tells us where the best value is. The question that must be answered is "will a particular one continue to get cheaper," with the goal being to buy it when it is the cheapest compared to the other. New purchases of either should be viewed the same as conversion from one to the other. For example, if GSR tells you to be converting gold to silver it is also telling you to be buying silver instead of gold.

jmski52 · October 22, 2014 1:56PM

New purchases of either should be viewed the same as conversion from one to the other. For example, if GSR tells you to be converting silver to gold it is also telling you to be buying silver instead of gold.

That's about the same thing that I was going to say. If you are stacking anyway, why not simply save the transaction costs of buying & reselling either gold or silver and just use the ratio as an indication of which one to buy?

derryb · October 22, 2014 1:59PM

It is also telling you which one to sell if you are "unstacking."

mariner67 · October 22, 2014 2:14PM

" For example, if GSR tells you to be converting silver to gold it is also telling you to be buying silver instead of gold."

If the GSR tells you to convert silver to gold wouldn't that be a low GSR? So wouldn't that also mean you should be buying gold not silver as stated above?
Long day for me so maybe my brain is tired and working backwards.

derryb · October 22, 2014 2:19PM

<< " For example, if GSR tells you to be converting silver to gold it is also telling you to be buying silver instead of gold."

If the GSR tells you to convert silver to gold wouldn't that be a low GSR? So wouldn't that also mean you should be buying gold not silver as stated above?
Long day for me so maybe my brain is tired and working backwards. >>

Longer day for me, corrected and thanks: if GSR tells you to be converting gold to silver it is also telling you to be buying silver instead of gold.

derryb · October 23, 2014 12:58AM

<< 

<< New purchases of either should be viewed the same as conversion from one to the other. For example, if GSR tells you to be converting silver to gold it is also telling you to be buying silver instead of gold.

That's about the same thing that I was going to say. If you are stacking anyway, why not simply save the transaction costs of buying & reselling either gold or silver and just use the ratio as an indication of which one to buy? >>

Agreed. The transactions cost is a big hurdle to overcome just to break even and to try and time the market on top of that would not be an enticing proposition. Supposedly, silver is only about 18 times more prevalent than gold, and even more rarer than that above ground. Yet the ratio is obviously much higher due to the popularity of gold. One could be holding gold thinking 40:1 favors gold and all of sudden, silver gets to 20:1 and one would feel pretty silly about that. Conversely, it's not at all out of the question that gold may become 100:1 or 200:1 vs silver, and sustain at such levels, because with many folks, silver may not be "precious" enough (or at all) for whatever reasons. >>

Trading gold for silver involves low transaction costs.

derryb · October 25, 2014 12:34PM

A high GSR ratio tells us that silver is in a very good position to outperform gold.

rawteam1 · October 25, 2014 2:03PM

<< A high GSR ratio tells us that silver is in a very good position to outperform gold. >>

It does huh? Doubtful, in fact real doubtful, it's just a price ratio that can be done with any 2 or more items in the world, and any story in the world can be made up to create any scenario, and make it seem real...

derryb · October 25, 2014 4:18PM

<< 

<< A high GSR ratio tells us that silver is in a very good position to outperform gold. >>

It does huh? Doubtful, in fact real doubtful, it's just a price ratio that can be done with any 2 or more items in the world, and any story in the world can be made up to create any scenario, and make it seem real... >>

u obviously no nothing about price ratios.

rawteam1 · October 26, 2014 12:59AM

U obviously think u do... Lol

derryb · October 26, 2014 1:46AM

appears so. Try finding a thread where you have some basic idea of what is being discussed. Baby steps.

DoubleEagle59 · October 26, 2014 1:33PM

I have to side with derryb on this one.

Trade your gold for silver at a 70 to 1 ratio and then swap back this same silver for gold when the ratio is 50 to 1.

You will increase your original quantity of gold ounces by 40%.

Swapping PM's involves two important features:

One, it has nothing to do with price, but rather the price 'relative' to each other.

and two, the swap has to be at least twice, to make any gain whatsoever.

On other point, for the stacker who keeps his PM's for the long haul (let's assume you started when the prices were low in the year 2000) it makes perfect sense to utilize this strategy over the years. It will increase your 'ounces' in huge amounts, regardless if the price goes up or down.

Justacommeman · October 26, 2014 1:38PM

Or instead of swapping it may tell you what's "better"to stack if you are a stacker

Mark

tneig · October 27, 2014 9:31PM

I'm swapping out generic silver for basic gold to reduce my weight and storage factor and to have more familiar sellable stuff,
but if I come across some Englehard bars at spot+$1 I'll by them too. Or a good ASE deal.

Question: For doing it for GSR swapping, does that imply you need to keep doing it or go through both cycles to make it worth it?

DoubleEagle59 · October 28, 2014 12:54AM

<< I'm swapping out generic silver for basic gold to reduce my weight and storage factor and to have more familiar sellable stuff,
but if I come across some Englehard bars at spot+$1 I'll by them too. Or a good ASE deal.

Question: For doing it for GSR swapping, does that imply you need to keep doing it or go through both cycles to make it worth it? >>

At a GSR of 71:1, personally I would not be swapping silver for gold. (I should add if your strategy is not to keep on swapping, then it's OK to swap once for gold and reduce your storage size).

and yes, as I explained in my previous post, a second 'swapping' is necessary to take increase your PM reserves.

derryb · October 28, 2014 1:09AM

GSR is primarily beneficial to determine which of the two is currently the best value when compared to the other.

Swapping back and forth is a long term play to increase holdings since GSR tops and bottoms are years apart.

guitarwes · October 28, 2014 2:01AM

<< I'm swapping out generic silver for basic gold to reduce my weight and storage factor and to have more familiar sellable stuff,
but if I come across some Englehard bars at spot+$1 I'll by them too. Or a good ASE deal.

Question: For doing it for GSR swapping, does that imply you need to keep doing it or go through both cycles to make it worth it? >>

For what I gather you're doing it backwards if you're swapping silver to buy gold. But it's yours and you can do with it what you doggone well please.

Baley · October 28, 2014 8:31AM

<< A high GSR ratio tells us that silver is in a very good position to outperform gold. >>

So, silver might go down (in US dollar terms) a smaller percentage than gold over the next couple of years?

tneig · October 28, 2014 10:30PM

Thanks for the swapping lessons. I was not really at the stage to understand the in/outs and long term of it before.
However, ignorance can be bliss. The more you know, the more complicated it gets. Keeping validity, cost, condition,
popularity, resellability, storage, type balance, investment value, privacy, GSR in mind for every movement is interesting.

I did go into my favorite place yesterday to buy good silver, like Englehard bars, but keeping in mind all of the above,
when you get a good deal, sometimes its as simple as Take It. They only had this 2013 AGE below,
so I bought it for $1260. I still have more generic silver but have moved a lot of the previous bulk out and have
what I think is a more reasonable balance of physical weight.

The Gold/Silver Ratio Strategy

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