Swapping the Gold/Silver Ratio – Seeking a 15 – 35% Return With No Cash Outlay
The upward trend in the metals has many investors owning both. But, there’s more you can do with gold and silver bullion than just buy and hold. You can also periodically trade, or “swap”, one for the other. To do so successfully, you first need to understand the gold/silver ratio.
The gold/silver ratio tells you the number of ounces of silver it would take to purchase one ounce of gold at a specific time. If you examine gold and silver prices going back 4,000 years, will find:
The historical ratio is 16:1 (it has taken 16 ounces of silver to buy 1 ounce of gold)
For the last 100 years, the ratio has been 30:1
In the last 12 years, the ratio has held closer to 60:1
In just the past the past 5 years, the ratio has fluctuated from the low 40′s to almost 100
As of March 1st, 2011, the gold/silver ratio was sitting slightly below 40:1
How do we take advantage of this fluctuation?
First – we time our purchases based on the ratio. When the ratio is relatively high, we favor silver in new purchases. When the ratio is relatively low, we favor gold.
Last – we act when the ratio reaches tops and bottoms. When the ratio is high, we swap gold for silver. Then when the ratio drops, we swap silver back into gold. Said another way, we swap silver for gold when silver has appreciated faster than gold. Then, we swap gold back into silver when silver becomes “cheap” relative to gold. Every time we go through this cycle – gold to silver and back to gold – we increase our ounces. That’s the whole objective. For example:
Suppose you had one ounce of gold, and the gold/silver ratio rose to 80:1. You would swap your one ounce of gold for 80 ounces of silver.
When the ratio contracted to 40:1, you would swap your 80 ounces of silver back for 2 ounces of gold, doubling the number of ounces you hold.
Next – we buy the form of silver or gold that offers the possibility of greater profits. During periods of high demand, investors will often bid up the premium on certain items 20 to 40% or more of their underlying value. At that point, we can swap the high premium items for others with lower premiums – capturing much of the difference, and converting that difference into extra ounces of metal.
Plus, utilizing this technique does not require any additional monetary outlay. Taking advantage of this ratio strategy beats the alternative – sitting still waiting for the price to rise.
Taxes – If you realize a profit from the transaction, you may owe tax on the gain. We do not offer tax advice. Please consult your tax specialist.
Market risk – I do not determine swapping price points independently. Rather, I lean heavily on others in the industry that have also been practicing technique for decades. The market may not cooperate. The challenge is correctly identifying the swapping points based on the relative valuations between the metals. The ratio might move much higher or lower than our target. We would then need to wait longer for the ratio to readjust itself. This is the essential risk to those trading the ratio.
Costs – Transaction costs such as shipping, the bid-ask price spread and commission can reach as much as 8%, although they should be lower. We will need to hold the trade long enough to recoup the transaction costs. Transaction costs associated with trading physical metals are higher than trading ETF’s, futures or other paper instruments. In order to keep your costs low, we charge only one-half of our normal commission for a swap transaction. Many others will charge a full commission on both the buy and the sell side. Be careful.
More Ounces at no cost – The Gold/Silver ratio trading strategy takes an investment that is otherwise stagnant and creates growth by increasing the number of ounces you hold – with no additional cash outlay. Between now and the end of the bull market you should conservatively expect to double your ounces utilizing this strategy.
What You Need to Know
When I first started to buy metals almost 20 years ago, my mentor frequently reminded me that he was not a prophet. In the same vein, if I am wrong about gold/silver ratio, it will cost you money. You’ll buy silver instead of gold and the gold will outpace the silver, or vice versa. I don’t think that will happen. Or, if it does, it will be temporary. I have successfully deployed this strategy numerous times. Sometimes the time-frame between swaps is relatively short – maybe only a few months. Other times it has taken two years or longer.
I am recommending swapping silver for gold when the gold/silver ratio drops to 48 or less. Consider swapping more if the ratio drops further. We will then seek the opportunity to swap that gold back into silver, capturing that gain in additional ounces of silver.
Because there are commissions and other transaction costs, you will not realize exactly the same ratio as the spot ratio.
The swapping strategy works for both small and large investors as long as you are willing to swap (150) ounces of silver or more. We will swap into the lowest cost, most readily available, most liquid gold coins – whatever offers you the most gold for your silver.
This is not a solicitation, only a strategy. Please do your own due diligence and make your own investment decision.
I still ultimately favor silver over gold as I remain convinced that the ratio will reach 16:1 (or lower) at the top of this bull market.
It is impossible to swap an exact amount of one metal for the exact amount of another. For example, one ounce of gold might buy 50.17 ounces of silver, but never exactly 50 ounces even. I do my very best to swap as close to even-up as possible. The residual we will settle in cash. You may owe a small amount, or you may be due a small amount. I attempt to keep these amounts under $100.