I liken investing in gold and silver to treasure hunting. If you have ever held gold or silver in your hand, you will know that it holds a certain allure. This is especially true of gold. People also like that they won’t rust. But a lot of folks look at precious metals investing as something to scoff at. They say that gold and silver aren’t a productive investment. Playing the gold silver ratio enables one to make this “passive” investment a more vital one.
Historically, gold and silver have retained a certain ratio. Most experts think that a 16 to 1 ratio is a good historical representation. This means that it takes 16 ounces of silver to buy 1 ounce of gold. In different times in history, this ratio has been fixed at different levels to stabilize markets and currencies. It brought predictability to the market. Businesses and investors love predictability.
Until very recently, this ratio has remained pretty consistent. However, in our area of fiat, central bank notes, this ratio has fluctuated wildly. We have seen lows around 10 and highs near 100. Given these swings, one can play the price spread between gold and silver to increase one’s stores of those metals. Let’s use an example.
Typically, anything under 40 or above 70 is a time to think about swapping. Recently, the gold silver ratio was flirting with 47 on the ratio scale. That meant that it took 47 ounces of silver to buy 1 ounce of gold. At this point, an investor might swap some of his silver for gold, thereby playing the price spread. Conversely, if the ratio exceeds 70, an investor would most likely swap some of his gold for silver. This again is a simple price spread play.
Playing the price spreads between gold and silver allows an investor to make his metals an active investment. An investor can do very well investing in these metals long term on the metals’ own merits. But, by playing the gold silver ratio, an investor can increase their effective stores to hedge against monetary policy.