While nothing is guaranteed, it's true that you very well could double the amount of gold you could possibly hold today by not buying today, or by trading it away—at least for now.
This article is a followup to what turned out to be sorta introductory in yesterday's article. As far as actionable info, you don't need to go back and read that one. This will do. If you're interested in some background info, it might be helpful.
A little over four years ago I wrote an article on Seeking Alpha, encouraging investors to consider playing the ratio between gold and silver rather than merely building up their gold holdings. If one looks at the historical swings, an unmistakable pattern emerges that can be taken advantage of. To be clear, this isn't about timing or dollars, necessarily. It's about trading metals and increasing ounces.
Silver's Changing Market
While gold's use has morphed a bit over the years, its expense has protected it from becoming an industrial commodity in comparison to many other metals. Silver, on the other hand, has been used for a wide array of products, some of which render it all-but impossible to reclaim.
I'm not going to go into the details on where this currently stands in this article. You can read all you want to know, and more, in the 2016 World Silver Survey, as well as in my article linked above and my follow-up article found here. All three get into the supply of silver in contrast with gold, as well as current known stockpiles.
Keep in mind that the known stockpiles are massively different than what truly exists. There's simply no way to know how many people are holding silver and gold in their homes, buried in their yards or stashed wherever. In some countries it's very common. In others it's hardly considered. Yet, even then, those who do so tend to be quiet about it.
AG/AU Ratio
If you don't really care about these numbers, you can skip down to "The Strategy" below.
Note that the chart above is a bit dated, but it's still just as applicable. There are three references, silver, gold and the silver/gold ratio (red). As you can see, the ratio has a somewhat inverse relationship with the metals. During silver's peaks, the ratio was at its lowest. It's hard to see clearly, but gold's peak tends to lag silver's, as silver is more volatile.
Some will remember the massive gold and silver moves leading into 1980, with silver peaking at about $50 in January and gold at $850 (21st). The ratio that day dipped to 17. In December, 1979, the ratio hit about 14, when gold was $456 and silver $32.
Again, in 2011, gold and silver peaked. On April 29, silver reached $49.21 per ounce. On that same day, gold reached $1535, bringing the ratio to about 30. A few months later, on August 30th, gold peaked at 1828.50. On the same day, silver reached $40.90, a ratio of about 44. Note the lag. It is likely that this lag reflects electronic trading, which wouldn't have been a factor back in 1980.
Source
Now take a look at the valleys, when the ratio was widest. The highest the ratio has ever been was in February, 1991, when it briefly reached 99. On that date gold hit $364 and silver $3.68.
In December, 2008, the ratio got to 81, when silver was $10.71 and gold $869.75. Then, just a few months ago (March), the ratio again reached 81, with silver at $15.39 and gold $1,240.
Setting dollars aside, if we just focus on the ratio, we can see strong and consistent peaks and valleys. The ratio moved as follows.
- 14 - December, 1979
- 99 - February, 1991
- 46 - November, 2006
- 81 - December, 2008
- 30 - April 29, 2011
- 81 - March, 2016
Having come off of recent lows, it may be that we won't see 81 again. Today, with silver at about $20 and gold at $1,352, the ratio is hovering around 67. According to Elliott Wave Trader, Avi Gilbert, we likely won't see ratios much higher than current levels again. In an update this week, he states,
I do not see anything strongly bearish in the chart. While I can certainly be wrong, the most downside I see at this time is for a c-wave down in the metals charts.
His analysis of gold (GLD) and silver are found in the following charts.
While anything can happen, his analysis would indicate that the next contraction may be the lowest levels we'll see in metals for the foreseeable future, and perhaps ever. Where will this contraction take the ratio? All we can do is guess, but into the 70s may offer the best opportunity, though at the current 67, perhaps waiting isn't worth the risk.
The Strategy
It's really quite simple. When the ratio is high, you buy silver or trade your gold for silver. When the ratio is low, you buy gold or trade silver for gold. We'll make a few quick comparisons to show how trading the ratio would work.
Source
Scenario 1
Suppose you had $10,000 to invest today, and knew you wanted to buy some gold. This would buy you about 7.39 ounces. And let's also suppose that the next high in gold takes place five years from now, at $3,000. You would then have $22,170 worth in gold.
Scenario 2
You take the same $10,000 and buy silver, gaining you 500 ounces. And let's suppose that in five years, when gold is at $3,000, the ratio drops to 30. This would put silver at $100, which means that your investment now stands at $50,000. Now, if you still want to hold gold, you trade your silver for gold, ending up with 16.66 ounces of the yellow metal. In other words, by going with silver today and trading for gold at a later date, you could end up with more than twice as much gold than if you were to buy gold today.
Conclusion
If you are already holding precious metals, consider trading a portion of your gold holdings for silver. Watch the ratio and wait for it to approach a level where you're ready to trade back. It might not be 30. Perhaps you'd rather do so at 40. Or maybe you want to layer into gold from silver.
Then, depending on your goals, you should gain a little more value in your gold holdings before the next correction. Maybe you'll want to cash out shortly after swapping. Remember, in about four months during 2011 gold gained around 20% between the ratio's low and gold's high.
Whatever you do, take advantage of an opportunity that has a high probability of increasing your total ounces of gold, regardless of how much the price fluctuates.
Rockin' on,
Another Joe
My introduceyourself HERE.
