Evaluate this gold/silver investment strategy

I put this in GD since it will lend itself more to debate than factual answers.
The idea is that silver is trading at price that is a ratio of 1/80 to golds price where it normally trades at a 1/60. Someone suggested that silver is a buy because of the arbitrage*. Note: this is not really arbitrage but his idea was like this.

Buy 240 toz of silver. That is the equivalent of 3 toz of gold. Later when the ratio is “properly” 1/60 you trade in the silver for 4 toz gold. Profit!!

It seems to me this does not take into account “buy low, sell high” and it this strategy should be integrated into a comprehensive plan like:
Buy at $X
Convert when ratio is 1/Y
Sell at $Z

Am I missing something? Is this freedom gold just waiting for me to stake my claim?

*Yes he is a silver stacker/economy hedger

What is the advantage of trading for gold vs. selling when the price goes up?


Hypothetically, you can do the trade when the price of gold comes down or the price of silver goes up. So, even if the price of silver goes down, as long as it goes down less than gold, I guess you profit in terms of gold, as long as the ratio is now “correct”.

I guess if you really wanted to arbitrage and you were convinced the proper ratio is 1/60, then you would go short gold to buy the silver, then wait for the market to go back to the proper ratio and reverse those trades. You would have to put some money in initially, but much less than if you just buy the silver.

Anyway, this is in no way an arbitrage and there’s no rule that says silver has to be some specific fraction of the price of gold.

Before you talk about how to plan the trade, you need to figure out exactly why you think the ratio should fall. A vague claim that it “normally” trades at 60 is meaningless, unless you can show the average price of something in the past is a statistically valid predictor of the future (quick summary: it’s not). The ratio traded at about 16:1 for centuries, and it has been all over the place this century. Silver bugs have been saying for literally decades that the ratio should be much lower, based on abundance, supposed pent-up demand for silver, price manipulation conspiracy theories, etc. etc.

I’m not saying the trade is necessarily wrong, but you need to do a lot more work here to figure out why you are getting into this trade. And it’s not remotely “arbitrage”, any more than going long silver and short pineapples.

You think that the ratio should be 1:60, but the aggregate of all other investors in the world think that it should be 1:80. Is there something you know that all the rest of them don’t?

For the sake of the debate, let’s assume the ratio goes back to 1/60 at some time.
So if silver is $20/oz I spend $4800 to buy 240 toz. Later the ratio is 1/60 but silver is $10/toz (so gold is $600/toz) so I got 4 toz of gold worth $2400 and I only spent $4800. In this scenario gold needs to go back up to $4800 to make a profit. I guess the theory is that if I bought the gold earlier (3 toz in stead of 4) then it has to go up to $1600 so … profit?

Like I said this seems like more of a hedge than an investment strategy.

Erm, that’s the $64,000 question. Do you want to debate the trade, or do you want to know how to execute the trade? Execution is easy - by far the simplest way to do it is to buy silver futures and short gold futures.

No. The gold/silver ratio is not an asset class. It’s not an arbitrage, it’s not a hedge, it’s not an investment strategy, it’s a trade. You are taking a speculative directional view on something that’s now trading at 80. If it goes up, you will lose money, if it goes down you will make money.

(And you have yet to present any clear reasoning for why it should go down.)

So, over the last 20 years, the average has, in fact, been 1/62 and is now about 1/80. However, over that time period, it has been as low as 33 and as high as 83, and basically all over the place. The last time it was in the low 60s was way back in 2013, so if this were an arbitrage, it has been hanging around for a long time waiting for someone to act on it.

As Riemann says, it’s just a directional view on the prices of gold and silver. It’s not an arbitrage in any way.

When applied to stocks, this is usually called “pairs trading.” It works a lot of times, except when it doesn’t. If you’ll look back far enough in time you’ll see that 12 to 1 was the standard and then 15 to 1 or 16 to 1 was the standard. These were mandated. When the U.S. went on a gold-only standard around 1900, the price of silver was allowed to float. This shows the ratio .

(Note that looks like a log scale).

You can say 60-1 is right, but that’s only if you look at about 1981 to the present. If you’d bought silver and sold gold in 1950 when the ratio “bottomed out” at 40-1, you’d probably have gone broke with margin calls before finally having been proved right around 1980. Do you want to take that chance?

I would add that I have bought some gold in the past, and when it came time to sell it, I was surprised at the difference between sell and buy prices. Just seems to me that the “commission” on each transaction of these metals, if you’re actually dealing with the metals themselves, rather than an ETF, would make it quite a bit more difficult for the individual investor to achieve a good return on an investment scheme like this.

The average might be around 60, but look at this chart and tell me that this is something that reliably reverts to the mean:

Plus, as I said, it traded for literally centuries at 16:1. Based on your friend’s mean reversion logic, he would have bet his house on going short it when it got up to 20:1, right?

You can trade with minimal transactions costs using futures for something like this. 3 e-mini silver futures is pretty close to the same size as 2 gold futures, around $130,000 notional.

Or you could buy $65,000 of a silver ETF and short 1 gold future, again minimal transactions costs without needing to borrow anything.

Smaller than that, ask your broker about borrowing a gold ETF for the short side, it won’t be too difficult.

None of this would be hugely expensive, but the cost of carrying the position could add up over time if you carried it for years, and I’ve yet to hear any reasoning why the trade should work in the short term.

I know less than zero about investing, but I honestly think that in this particular case it gives me a potentially-useful point of view.

OP, when I’m reading your initial suggestion, and the advice from obviously knowledgeable people, what strikes me is that there are so many variables involved - so many ways for something to go wrong, so many “gotchas” waiting around so many corners. It sounds to my naïve ears like you’ve found a great way to maximize risk, by taking a ton of little risks all at once. I’m sure that’s not the whole truth, but it might be a little piece of it.

It certainly isn’t clear to me why there should be a relationship between the value of gold and the value of silver. If a mine opens up tomorrow that produces a lot of silver but no gold, the value of silver goes down. If it produces gold, the opposite.

In the past, certain governments had an official convertibility rate, so you could arbitrage the difference in price. But those days are long gone. There doesn’t seem to be a mechanism where the two prices are related, whereby if gold is expensive or cheap relative to silver there’s some market force that forces it to return to some natural ratio.

This kind of reminds me of the strategy of how to make a million dollars flipping houses. First, you find a house that is selling for less than it is worth. Then, you buy it. Then, you sell it for more than you paid. That’s a great strategy. The hard part is being sure that the house you buy is selling for less than it is worth.

Same here. How do you know that the ratio of gold to silver is going to go to 1/80? Like Lemur866 says, if there is some reason to believe there is a natural equilibrium, I haven’t seen what it is.

Good luck no matter what you do. Remember your poverty-stricken friends on the SDMB when you retire to your private island with doe-eyed exotic women bearing mojitos and wearing nothing but palm fronds.


I would say that this is just as good as any other precious metal investment strategy. Which is to say: not very good.

The problem with investing in precious metals is that you’re in a zero-sum game (well, negative sum, after transaction costs). If you’re right about the future movement, you make money, and someone else loses money. If you’re wrong, the opposite. The average investor in precious metals loses money.

If you invest in a business that actually generates wealth, on the other hand, there’s a positive sum game. The average company creates wealth, meaning the average shareholder makes money over time.

Hmmmm. I never thought of it that way.

I guess a huge percentage of people consider themselves above average. :slight_smile:

I’ve heard of metals being used as a hedge - hoping that gold will continue to be worth something even after their major investment in Bitcoin (or whatever) dies.

On the other hand, staying away from both of those seems sane.

Precious metals make sense as a hedge. But they’re generally a pretty small part of your portfolio.

And if you seriously believe that there’s a major financial crisis coming, then, sure, gold is going to do great. But on average you’ll be wrong.

The idea that there’s some natural ratio that gold and silver prices naturally gravitate toward sounds like nonsense to me.

Where did you think the profits were coming from?