Gold/Silver Ratio Swap: Seeking a 15-35% Yield with No Cash Outlay
The bullish trend in metals has many investors who own both. But there is more you can do with gold and silver bullion than simply buy and hold. You can also periodically exchange, or “trade”, one for the other. To do this successfully, you must first understand the gold/silver ratio.
The gold/silver ratio tells you how many ounces of silver it would take to buy one ounce of gold at a specific time. If you examine gold and silver prices going back 4,000 years, you will find:
- The historical ratio is 16:1 (it took 16 ounces of silver to buy 1 ounce of gold)
- For the last 100 years, the ratio has been 30:1
- Over the past 12 years, the ratio has stayed closer to 60:1
- In the last 5 years alone, the ratio has fluctuated from the low 40s to nearly 100.
- As of March 1, 2011, the gold/silver ratio was 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 prefer silver on new purchases. When the ratio is relatively low, we prefer gold.
- Latest – we act when the proportion reaches maximums and minimums. When the ratio is high, we trade gold for silver. Then, when the ratio drops, we trade the silver back for gold. Put another way, we trade silver for gold when silver has appreciated faster than gold. We then trade gold back for silver when silver becomes “cheap” relative to gold. Every time we go through this cycle, from gold to silver and back to gold, we increase our ounces. That’s the whole goal. For example:
- Suppose you have one ounce of gold and the gold/silver ratio increases to 80:1. You would exchange your ounce of gold for 80 ounces of silver.
- When the ratio contracted to 40:1, you would exchange your 80 ounces of silver for 2 ounces of gold, doubling the number of ounces you have.
- next – we buy the form of silver or gold that offers the possibility of higher profits. During periods of high demand, investors often bid for the premium on certain items in periods of 20 to 40% or more of their underlying value. At that point, we can trade the high-premium items for lower-premium items, capturing much of the difference and converting that difference into additional ounces of metal.
Also, using this technique does not require any additional monetary outlay. Taking advantage of this ratio strategy outperforms the alternative: sitting around waiting for the price to rise.
- Taxes – If you make a profit from the transaction, you may owe taxes on the profit. We do not offer tax advice. Please consult your tax specialist.
- Market risk – I do not determine exchange price points independently. Rather, I lean heavily on others in the industry who have also been practicing the technique for decades. The market may not cooperate. The challenge is to correctly identify the trading points based on the relative valuations between the metals. The ratio could move much higher or lower than our target. Then we would have to wait longer for the relationship to readjust. This is the essential risk for those negotiating the relationship.
- Costs – Transaction costs such as shipping, bid-ask price spread, and commission can reach up to 8%, although they should be lower. We will have to maintain the operation long enough to recover the transaction costs. The transaction costs associated with trading physical metals are higher than trading ETFs, futures, or other paper instruments. To keep your costs low, we only charge half of our normal commission for an exchange transaction. Many others will charge a full commission on both the buy and sell sides. Be careful.
- More Ounces at no cost – The Gold/Silver ratio trading strategy takes an otherwise stagnant investment and creates growth by increasing the number of ounces you have, with no additional cash outlay. Between now and the end of the bull market, you should conservatively expect to double your ounces using this strategy.
what you need to know
- When I started buying metals almost 20 years ago, my mentor frequently reminded me that he was not a prophet. Similarly, if I get the gold/silver ratio wrong, it will cost you money. You will buy silver instead of gold and gold will outperform silver, or vice versa. I don’t think that will happen. However, if he does, it will be temporary. I have successfully implemented this strategy numerous times. Sometimes the time period between trades is relatively short, maybe just a few months. Other times it has taken two years or more.
- I recommend exchanging silver for gold when the gold/silver ratio drops to 48 or less. Consider trading more if the ratio drops further. We will then look for an opportunity to trade that gold back for silver, capturing that gain in additional ounces of silver.
- Because there are commissions and other transaction costs, you won’t get exactly the same rate as the spot rate.
- The trade strategy works for both small and large investors, as long as you are willing to trade (150) ounces of silver or more. We will exchange the most liquid, lowest cost and most readily available gold coins, whichever gives you the most gold for your silver.
- This is not a request, just a strategy. Do your own due diligence and make your own investment decision.
- Ultimately, I still prefer silver over gold as I remain convinced the ratio will reach 16:1 (or less) at the top of this bull market.
- It is impossible to exchange an exact amount of one metal for an exact amount of another. For example, one ounce of gold can buy 50.17 ounces of silver, but never exactly 50 ounces. I do my best to trade as close to match as possible. The residual will be settled in cash. You may owe a small amount or be owed a small amount. I try to keep these amounts under $100.
The gold/silver trade opportunity comes up intermittently. If you are interested in learning more about how you can increase your metal holdings by 15-35% or more, with no cash outlay, please contact us. The window of opportunity is very narrow.