Gold/Silver Ratio Swap – Pursuit of a 15-35% Return with No Cash Outlay
The uptrend in 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 swap, or “barter,” 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 the prices of gold and silver going back 4,000 years, you’ll find:
- The historical ratio is 16:1 (it took 16 ounces of silver to buy 1 ounce of gold)
- For the past 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 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 exchange gold for silver. Then, when the ratio drops, we exchange the silver for gold again. Put another way, we trade silver for gold when silver has appreciated faster than gold. Then, we trade gold back for silver when silver becomes “cheap” relative to gold. Each 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 trade 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 20-40% or more of their underlying value. At that point, we can swap the high-premium items for lower-premium ones, capturing much of the difference and converting that difference into additional ounces of metal.
Furthermore, using this technique does not require any additional monetary outlay. Taking advantage of this ratio strategy beats the alternative: sitting around waiting for the price to go up.
DEPOSITS
- Taxes – If you make a profit on 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 the 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 exchange 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 who negotiate the relationship.
- Costs – Transaction costs such as shipping, bid-ask price spread, and commission can be as high as 8%, though 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 down, we only charge half our normal fee for an exchange transaction. Many others will take a full commission on both the buy and sell sides. Be careful.
BENEFITS
- More Ounces free of charge – The Gold/Silver ratio trading strategy takes an otherwise stagnant investment and builds growth by increasing the number of ounces you hold, without 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, perhaps just a few months. Other times it has taken two years or more.
- I recommend trading silver for gold when the gold/silver ratio drops to 48 or below. Consider trading more if the ratio falls 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 ratio as the spot ratio.
- The exchange strategy works for both small and large investors, as long as you are willing to exchange (150) ounces of silver or more. We will trade the most liquid, lowest cost and most readily available gold coins, whatever 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 that the ratio will reach 16:1 (or less) at the top of this bull market.
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- 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 even as possible. We will settle the residual 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 trading opportunity occurs intermittently. If you are interested in learning more about how you can grow your metal holdings by 15-35% or more, with no cash outlay, please contact us. The window of opportunity is very narrow.