Spock sent out a chart to day of the GSR.

There have been other charts here and comment but I wanted to try to grasp this better.

Kind of like learning where to place a volley when up at the net!…………

So it looks like the ratio is in the mid 80″s right now and this article points to maybe the 50′ as being preferred?

 

For the hard-asset enthusiast, the gold-silver ratio is common parlance. For the average investor, it represents an arcane metric that is anything but well-known. The fact is that a substantial profit potential exists in some established strategies that rely on this ratio.

How the Ratio Works

When gold trades at $500 per ounce and silver at $5, traders refer to a gold-silver ratio of 100. Today the ratio floats because gold and silver are valued daily by market forces, but this has not always been the case. The ratio has been permanently set at different times in history, and in different places, by governments seeking monetary stability.

  • 2007 – For the year, the gold-silver ratio averaged 51.
  • 1991 – When silver hit record lows, the ratio peaked at 100.
  • 1980 – At the time of the last great surge in gold and silver, the ratio stood at 17.
  • End of the 19th Century – The nearly universal fixed ratio of 15 came to a close with the end of the bi-metallic era.
  • Roman Empire – The ratio was set at 12.
  • 323 BC – The ratio stood at 12.5 upon the death of Alexander the Great.

These days, gold and silver trade more or less in sync, but there are periods when the ratio drops or rises to levels that could be considered statistically “extreme.” These extreme levels create trading opportunities.

How to Trade the Gold-silver Ratio

First, trading the gold-silver ratio is an activity primarily undertaken by hard-asset enthusiasts often called “gold bugs.” Why? Because the trade is predicated on accumulating greater quantities of metal and not on increasing dollar-value profits. Sound confusing? Let’s look at an example.

  1. When a trader possesses one ounce of gold and the ratio rises to an unprecedented 100, the trader would sell their single gold ounce for 100 ounces of silver.
  2. When the ratio then contracted to an opposite historical extreme of 50, for example, the trader would then sell his or her 100 ounces for two ounces of gold.
  3. In this manner, the trader would continue to accumulate quantities of metal seeking extreme ratio numbers to trade and maximize holdings.

Note that no dollar value is considered when making the trade; the relative value of the metal is considered unimportant.

For those worried about devaluation, deflation, currency replacement, and even war, the strategy makes sense. Precious metals have a proven record of maintaining their value in the face of any contingency that might threaten the worth of a nation’s fiat currency.

Drawbacks of the Trade

The difficulty with the trade is correctly identifying the extreme relative valuations between the metals. If the ratio hits 100 and an investor sells gold for silver, then the ratio continues to expand, hovering for the next five years between 120 and 150. The investor is stuck. A new trading precedent has apparently been set, and to trade back into gold during that period would mean a contraction in the investor’s metal holdings.

In this case, the investor could continue to add to their silver holdings and wait for a contraction in the ratio, but nothing is certain. This is the essential risk for those trading the ratio. This example emphasizes the need to successfully monitor ratio changes over the short and medium term to catch the more likely extremes as they emerge.G

Conclusion

There’s an entire world of investing permutations available to the gold-silver ratio trader. What’s most important is that the investor knows their own trading personality and risk profile. For the hard-asset investor concerned with the ongoing value of their nation’s fiat currency, the gold-silver ratio trade offers the security of knowing, at the very least, that they always possess the metal.