There are certain points in time when the gold silver ratio may be used to your benefit. In fact the gold silver ratio strategy is one that has worked successfully in the past and may be used to potentially buy a house for $31,000.
How gold and silver prices behave
The chart above compares the prices of gold and silver in US dollars on the monthly scale and each of these is expressed as a percentage change.
During a bull market both gold and silver initially go up together and as the bull market progresses silver outperforms gold. That is where participants become euphoric. However, when silver prices drop, they drop hard and the declines are usually worse than for the gold price. This elicits emotions of bitterness and frustration, particularly from those who bought into the preceding euphoric highs. Currently the gold price is doing well and coming close to its previous highs. Silver price is nowhere near it’s previous peak. In fact the price of silver is currently at levels that were seen in 2008. It is fair to say that many investors are fed up of silver and even lost hope of higher silver prices. These are the emotions that are commonly observed at market bottoms.
Silver price is much more volatile than gold and is more prone to bubbles and crashes. Your risk tolerance is therefore one of the factors that should inform your decision regarding whether to buy gold or silver.
Gold silver ratio correlations
The chart above shows the gold silver ratio (bars) and the gold price in US dollars (blue line). Currently the gold silver ratio is at historically high levels. What are the implications of this? The lower section of the chart shows the correlation between the the two and there is no obvious pattern of correlation.
The chart above compares the gold silver ratio to the price of silver. For the majority of the time, the gold silver ratio is strongly negatively correlated to the silver price (i.e. when the silver price increases, the gold silver ratio goes decreases). Also, whenever the gold silver ratio peaked above 80, silver prices were at relative lows. Of particular interest is the observation that before just before reaching relative lows, the correlation coefficient turned positive. The recent positive correlation suggests that we are currently at a relative low in terms of the silver price, and that a strong increase in the silver price is coming.
Gold silver ratio oscillations
The 100-year chart of the gold and silver ratio shows 3 major peaks. These major peaks have occurred at times of turmoil and this ratio is currently at historic highs. Of note, the ratio doesn’t spend very long at the extremes. It tends to spike rather than remain at high levels for sustained periods. The majority of the time is spent at ratio values between 40 and 70.
Profiting from the gold silver ratio by switching from silver to gold
These observations provide a potential opportunity to profit. The strategy involves buying silver when the gold silver ratio is at extreme highs and subsequently swapping silver for gold as the ratio reverts back to the mean (or swings to the opposite extreme). For example if you were to buy silver when the gold silver ratio is at 100 and then wait for the ratio to drop to 50 then you would have twice as much gold as if you just bought gold when the gold silver ratio was 100. If the ratio went fell to 33 then you would triple the amount of gold, and if it fell to 20 you would have five times as much as gold.
Although this is a reasonable strategy, there are potential pitfalls.
- This strategy requires patience since it can take years to play out.
- Silver takes up much more room than gold. The higher storage costs and space requirements would need to be factored in.
- Taxation when switching assets should be accounted for
- Availability of gold may be an issue when the gold silver ratio reaches low extremes
Profiting from the gold silver ratio by switching from gold to real estate
An alternative strategy is to switch from precious metal to real estate.
The above chart shows the median US house price from 1965 to 2020. House prices have consistently risen over time. However, this chart does not account for the loss of purchasing power of the US dollar over time.
The above chart prices houses in terms of gold compared to the gold silver ratio. In 1980, the gold silver ratio reached a low of 15 and at that time you could buy a house for 120 ounces of gold. Note that the troughs in house prices are associated with troughs in the gold silver ratio. Currently, 255 ounces of gold is needed to buy an average house in America. If you were to buy gold now, then wait for the gold silver ratio to drop to 15 at which time you sell the gold to buy a house, you would need 120 ounces of gold. At today’s price ($1720 an ounce) you would need to buy $207,240 worth of gold to buy house in the future if the gold silver ratio drops.
Profiting from the gold silver ratio by switching from silver to real estate
The above chart shows the average house price in America priced in ounces of silver compared to the gold silver ratio. Currently, 24,281 ounces of silver is required to buy an average house in America. In 1980 it only took 2,000 ounces of silver to buy an average US house. If you were to buy silver now, then wait for the gold silver ratio to drop to 15 at which time you sell the silver to buy a house, you would need 2,000 ounces of silver. At today’s price ($15.20 an ounce) you would need to buy $30,400 worth of silver to buy house in the future if the gold silver ratio drops.
This makes various assumptions and doesn’t account for factors such as transaction fees and taxation. Additionally, there is no indication at all as to how long this scenario would take to play out so would require patience. This is not meant as investment advice, it is simply an illustration of one of the ways investors may potentially profit from the gold silver ratio,