Two Simple Strategies to Profit From The Gold Silver Ratio

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Two Simple Strategies to Profit From The Gold Silver RatioIf you are unaware of the historical price relationship between gold and silver, then you are in the comfortable majority. It is a disadvantage not to understand the ratio that the two precious metals have traded at in the past, as you are missing out on opportunity to make money when the ratio changes to one extreme or the other.

The good news is that you can effectively understand the proper balance between gold and silver prices, and it does not require you to have a Master’s or PhD Degree in finance, investments, or accounting. In the paragraphs that follow, you will learn what the gold to silver ratio actually is, how this ratio has been defined in the past, how it fluctuated throughout history, how you can benefit and profit from it, and where the ratio will likely go in the future.

What Exactly is the Gold to Silver Ratio?

You can understand the gold to silver ratio in very simple terms. It is the number of ounce of silver that you have to trade to purchase one ounce of gold. So when gold is at $1,800 per ounce and silver stands at $35 per ounce, then you have a gold to silver ratio of 51.4. This ratio freely floats these days with both gold and silver prices determined ostensibly by market forces. In the past, this was not how the ratio worked. At various points in history, the ratio was defined and fixed by imperial decree as governments sought out a stable money supply.

How Was the Ratio Defined In the Past?

In days gone by, this gold to silver ratio was defined by governments who looked at the physical supply. While there were a few times and places where silver was actually rarer than gold, gold has generally been considered to be the rarer of the two precious metals.

When imperial governments saw that silver supplies were twelve times more plentiful than gold, then they would set a gold to silver ratio of 12.

How Did the Ratio Fluctuate In the Past?

You might be surprised how clearly defined the gold silver ratio has been since even before the time of Christ. When Alexander the Great died in 323 B.C., the ratio stood at 12.5 ounces of silver for one ounce of gold. During the long lived Roman Empire, this ratio was 12 silver ounces to 1 gold ounce. At the peak of the British Empire near the conclusion of the 1800s, the imperial government in London decided to end the long time ratio of 15 silver to gold ounces. They de-monetized silver to gold at this point, as they simply did not have any silver on hand anymore.

Gold silver ratio for the years 1950 - 2010

Gold silver ratio for the years 1950 – 2010

 

Gold silver ratio from 2000 - 20111

Gold silver ratio from 2000 – 20111

 

The gold silver ratio continued to exist, moved generally by market forces from the 1900s forward. By the year 1980 at the end of the last gold and silver bull market, the gold to silver ratio was 17. As silver hit its lows in 1991, this ratio blew out to an astonishing all time high of 100 silver ounces for each ounce of gold. In November of 2011, it sits at approximately 51. This represents an improvement on the gold silver ratio of the Great Recession and financial collapse, when the number temporarily increased to 80 silver ounces to 1 gold ounce.

How Can You Use this Ratio To Build Up Your Precious Metal Holdings?

For those of you who believe that you should build up solid gold and silver holdings, you can employ this ratio very wisely to increase your precious metals assets.

What you must do is to switch back and forth between gold and silver based on whether the gold to silver ratio is historically high or low.

As an example, if you owned a single ounce of gold and the ratio rose to the life time high of 100, then you would sell your one ounce of gold to acquire 100 ounces of silver. Then you would wait patiently for the ratio to drop back down towards a more typical ratio of 50 silver to gold ounces, so that you could trade in your 100 silver ounces for 2 gold ounces.

In this way, you would trade back and forth whenever the ratio became too biased to one side or the other so that you could constantly increase your precious metals holdings and maximize them whenever possible. It would not especially matter to you how high the dollar value of either gold or silver was in this strategy.

Where Will The Ratio Probably Go in the Future?

If history continues to be the reliable indicator that it has been in the past, then you can make some predictions on the future moves of the gold to silver ratio based on what we have seen. In recessions, silver tends to drop faster than gold, since silver has far more industrial applications than does gold. Similarly, silver rises quicker than gold will in a precious metals bull market, partly because of silver’s smaller available supply and inherent volatility.

How Can You As an Investor Profit From This Ratio?

Though most people are unaware of this historical gold silver ratio, you can make a great amount of money when you learn how to read and utilize it effectively. There are many well proven and established strategies that allow you to predict the future price moves up of silver when the ratio gets unnaturally high, as from 80 to 100.

These strategies are reinforced if you hold to the idea that governments will continue to devalue their currencies as they print more paper money out of nothing, that chaos and instability in the world economy will only get worse before they get better, and that the sovereign debt crisis has not yet played out fully.

One way that you can play this ratio to turn profits is to invest in Exchange Traded Funds for Gold and Silver. The most popular and widely traded precious metals ETF’s are GLD for gold and SLV for silver. With these Exchange Traded Funds, you can simply trade the gold to silver ratio at very little cost and overhead. You do not have to store precious metals in your wall safe or at your local bank in a safe deposit box.

All that you have to do is to establish an account with a discount online brokerage like TDAmeritrade, eTrade, Interactive Brokers, or Charles Schwab, as a few options. Then when the gold silver ratio climbs unnaturally high, you can purchase SLV. As silver rises to catch up with gold, your positions on the gray metal will gain in value. When it is time to sell your SLV as the ratio normalizes back down towards or below 50, then it will only cost you a few dollars in commission to close out your position and take your profits.

Alternatively, you can buy both GLD and SLV at the same time in your online trading account. As the ratio for gold silver rise to an unusually high level, then you can sell some gold and add silver to your account. Then when this ratio declines to a more typical number, you can sell some silver and instead add to your gold positions. This way, you are not committed entirely to either silver or gold as you trade the gold silver ratio.

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