For the hard-asset enthusiast, the gold-silver proportion belongs
to common parlance, however for the ordinary investor, this arcane metric is
anything but popular. Since there's terrific profit prospective making use of a
number of well-established methods that depend on this ratio, this is
unfortunate.
In a nutshell, the gold-silver proportion represents the lot of
silver ounces it takes to buy a single ounce of gold. It sounds basic, however
this ratio is more helpful than you might think. Keep reading to find out how
you can take advantage of this ratio.
How the Ratio Works
Traders refer to a gold-silver ratio of 100 when gold trades at
$500 per ounce and silver at $5. Today the proportion floats, as gold and
silver are valued daily by market forces, however this had not been constantly
the case. The proportion has been completely set at different times in history
- and in various places - by governments seeking financial security.
Here's a thumbnail overview of that history:.
2007-- For the year, the gold-silver proportion averaged 51.
1991-- When silver struck its lows, the proportion came to a head
at 100.
1980-- At the time of the last wonderful surge in gold and silver,
the proportion stood at 17.
End of 19th Century-- The virtually universal, fixed ratio of 15
came to a close with the end of the bi-metallism period.
Roman Empire-- The proportion was set at 12.
323 B.C.-- The proportion stood at 12.5 upon the death of
Alexander the Great.
These days, gold and silver trade basically in sync, but there are
phases when the ratio rises or drops to levels that could be thought about
statistically "extreme." These "severe" levels develop
trading opportunities.
How to Trade the Gold-Silver Ratio.
First off, trading the gold-silver proportion is an activity
mainly taken on by hard-asset lovers like "gold bugs". Why? Due to
the fact that the trade is predicated on accumulating greater amounts of the
metal and not on enhancing dollar-value profits. Noise confusing? Let's
appearance at an instance.
The essence of trading the gold-silver proportion is to switch
over holdings when the proportion swings to historically identified
"extremes." So, as an example:.
When a trader has one ounce of gold, and the proportion rises to
an unprecedented 100, the trader would then sell his/her single gold ounce for
100 ounces of silver.
When the ratio then contracted to a contrary historical
"extreme" of, state, 50, the trader would then offer his or her 100
ounces for 2 ounces of gold.
In this manner, the trader would continue to gather greater and
higher amounts of metal, looking for "severe" ratio numbers from
which to trade and optimize his/her holdings.
When making the trade, keep in mind that no dollar worth is
considered. The relative worth of the metal is thought about worthless.
For those fretted about devaluation, deflation, currency replacement
- and even war - the method makes sense. Rare-earth elements have a proven
record of preserving their value in the face of any contingency that may
threaten the worth of a country's fiat currency.
Disadvantages of the Trade.
The apparent difficulty with the trade is properly identifying
those "extreme" relative evaluations between the metals. If the ratio
strikes 100 and you offer your gold for silver, then the proportion continues
to expand, floating for the next 5 years in between 120 and 150, you're stuck.
A brand-new trading precedent has actually obviously been set, and to trade
back into gold throughout that period would suggest a contraction in your metal
holdings.
One might constantly continue to add to one's silver holdings and
wait for a contraction in the ratio, however absolutely nothing is specific. It
also points out the need to successfully keep track of proportion changes over
the medium and short term in order to catch the more most likely
"extremes" as they arise.
About the Author:
By Jack Pringle
