Gold/Silver Ratio Is Flagging
Updated
When the gold/silver ratio is high, gold is relatively more expensive than silver, by historical standards. Some people use this ratio to trade between the metals.
For a very long-term investor, the trade works like this: when the ratio is high, buy silver, and wait for the ratio to revert towards its mean. Then, sell the silver and buy gold at a better relative price and wait for the ratio to rise.
Using this oscillation you can accumulate precious metal using nothing but the mean reversion between the two metals.
Now, that said, the 19th century average gold/silver ratio, I believe, is around 47. By those standards, the ratio is extremely high right now. On the other hand, the rise has occurred in a very steady long-term rising trend channel that began during the Great Financial Crisis.
Long-term chart:
It seems to spend ages along one side of the channel before moving to the other and inhabiting that region for quite some time.
The question I cannot answer is: will the historical mean be revisited any time soon, or is the inflated ratio somehow a byproduct of unprecedented central bank intervention?
That said, I will add a couple of comments regarding the short-term picture. During the crash the ratio mooned, breaking out of the channel for the first time in geologic eons, and has since worked its way back in. The process of reentry looks to be taking the form of easily identifiable flagging, and that last flag looks to be breaking.
How would one trade this, if they were so inclined? I if they thought we were heading to the lower bound of the channel, one would buy silver now, and then if we find the bottom of that channel, perhaps swap it for gold, since the channel is gradually rising. That's just a guess. We live in unprecedented times and these assets might become quite volatile in the coming weeks and months.
If one believes we will ever revisit the ratio's very long-term mean in the 40s, they would only hold silver until it does. I have no idea if that will happen.
For a very long-term investor, the trade works like this: when the ratio is high, buy silver, and wait for the ratio to revert towards its mean. Then, sell the silver and buy gold at a better relative price and wait for the ratio to rise.
Using this oscillation you can accumulate precious metal using nothing but the mean reversion between the two metals.
Now, that said, the 19th century average gold/silver ratio, I believe, is around 47. By those standards, the ratio is extremely high right now. On the other hand, the rise has occurred in a very steady long-term rising trend channel that began during the Great Financial Crisis.
Long-term chart:
It seems to spend ages along one side of the channel before moving to the other and inhabiting that region for quite some time.
The question I cannot answer is: will the historical mean be revisited any time soon, or is the inflated ratio somehow a byproduct of unprecedented central bank intervention?
That said, I will add a couple of comments regarding the short-term picture. During the crash the ratio mooned, breaking out of the channel for the first time in geologic eons, and has since worked its way back in. The process of reentry looks to be taking the form of easily identifiable flagging, and that last flag looks to be breaking.
How would one trade this, if they were so inclined? I if they thought we were heading to the lower bound of the channel, one would buy silver now, and then if we find the bottom of that channel, perhaps swap it for gold, since the channel is gradually rising. That's just a guess. We live in unprecedented times and these assets might become quite volatile in the coming weeks and months.
If one believes we will ever revisit the ratio's very long-term mean in the 40s, they would only hold silver until it does. I have no idea if that will happen.
Note
I made a mistake above. The 20th century average is 47, not 19th.Note
Also, the tight channel began a couple of years after the GFC, not during.
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