Silver as a Signal to Buy Gold

- Dugald Malcolm, Montreal

Silver has been on a meteoric rise since August of last year. The 150% gain in the metal’s price has taken it from just $18 an ounce then to over $45 dollars an ounce today. But if you think its 8 month performance is impressive, take a look at how silver has performed over the last decade. Since 2001, prices have increased a mind blowing 1025%!

For those investors fortunate enough to have taken part in this phenomenal rally in silver prices, many might be asking what to do now. Some see prices here as being overextended and suggest it might be time to sell. While taking profit is never a bad thing, there is another option out there than to simply cash out.

Silver has long been regarded as gold’s little brother. Their special relationship lies in that they both have been depended upon as currency going as far back as 500 BC. Today, many still turn to silver and gold as the only “true currencies” in a world denominated mostly in fiat money.

So it should come as no surprise that the gold to silver ratio has been something that is and has been widely followed with great interest. The ratio is essentially the number of ounces of silver it takes to purchase one ounce of gold.

Above is the chart of the ratio for the last 20 years. As you can see, the current gold/silver ratio is just above 33 to 1. What is significant about this level is that they have not been seen since 1983.

For those holding silver now but not wanting to give up their real currency for fiat paper, they can employ a trading system based around the ratio. The concept is quite simple: when the ratio hits extreme lows, such as it did in 1983, one sells their silver position and immediately uses the proceeds to purchase gold. Conversely, when highs in the ratio are reached, such as when it hit 100 to 1 in 1991, one sells their gold position and uses the proceeds to purchase silver. The goal here is to continuously increase the size of your respective position while never being left out of the gold or silver market altogether.

It is important to note that some might argue that silver might actually return to its historical ratio of 16:1. With gold at $1,500 an ounce, that ratio would put silver at $94, over 108% higher than where it trades at today. One must keep in mind, however, that this ratio has not been the norm since the early 19th century. So, using more recent history as a guide, the current ratio level of 33 to 1 could very well represents a good time to exchange one’s silver holdings for gold.

Using the gold to silver ratio as an indicator, it would seem silver’s high prices might well be flashing a buying signal… for gold, that is.

Average rating
(0 votes)