Playing the Gold/Silver Ratio with Physical Metals - Transaction Costs Can Tip the Balance

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Playing the Gold / Silver Ratio

Its every stackers goal and dream at some point honestly. Create free precious metals with nothing other than your Precious Metals.

How is that you say - are we in the world of magic and dragons with a wizard in a dark room practicing Alchemy? Not quite - but the end result may feel like magic if it works out to your favor.

What is the Gold/Silver ratio

Simply put, its the number of ounces of silver it takes to buy one once of gold. As these two metals move independently based on a number of factors the ratio can change over time.

The gold/silver ratio can be tracked over long periods and may give insight to a potential mispricing of one of the assets. It could be a great opportunity to take advantage of it you are confident nothing has changed for either metals outlook/use case scenarios.

Lets take a look at the 100 year history. If you stop over to macrotrends.com and look at their 100 year chart.

The chart shows that over time the ratio has pretty wild swings. As much as 3-4x as much silver required to get an ounce of gold.

Why pay attention

A lot of silverbugs have the idea of printing some free silver by playing the ratio a few times over their life. Trade gold when the ratio is some where in the 90-100 range, and then trade silver back into gold when the ratio is in the 40-60 range. You don't need to be perfect to have some really big gains.

The gains are not in Dollars (USD) but in terms of ounces... The end goal of most stacker is weight in ounces not dollar equivalent.

Example

Buy Silver when the ratio is high - lets look at a recent graph

Last April you could have bought silver when the ratio was 110. Lets say we bought 110 ounces with our magic money we got last year. Now fast forward to 2021 and the ratio drops to 65. That means we could take our 110 ounces of silver and get ~1.7 ounces of gold.

If we let things continue and the ratio climbs again to 110 in our imaginary world, we can then turn that 1.7 ounces of gold into 187 ounces of Silver. That's a pretty nice profit for a physical investment you can hold and keep.

This isn't like the DeFi world - but for those of us who like a side of Silver and Gold to go along with our crypto wallets its a something to watch out for.

Real Life - Fee's make it harder.

Yup - that example was too easy. You never get spot on both trades - sometimes you get burned on both ends. I called a Local Coin Shop (LCS) to get some information on what the trade would look like today.

• Spot Silver was 25.25 when I called

• Spot Gold was 1729

• Gold/Silver Ratio 68.4

• Price paid for 1oz round was $25

• price paid for 10oz bar was $26

• price of 1oz Gold was 1900

As you can see this makes the trade a little harder to pull off. There is a $180 premium on the ounce of gold and I can do well with my silver trades.

The amount they were willing to pay for silver was a little shocking - but this just shows the physical silver market is really disconnected from the paper market. 10oz bars are no where to be found, and 1oz are almost as bad. Gold is almost always easier to find. Bigger market, high cost point to enter and more miners with less industrial uses.

To pull my trade off today it would have cost me 76 1oz rounds or 7 10oz bars and 3ish rounds to make the trade even. The profit margin for the LCS added 5-7 ounces to my effective ratio. While the paper market showed 68.4, my physical ratio is 76. That can really change the picture about how big the movement needs to be to effectively pull this trade off.

These premiums are one of the hardest factors to calculate in your investment plan as they are always fluctuation and changing as the demand for physical silver changes.

Decision.

The premiums gave me pause today. While I would like more gold, I honestly think silver could have a huge run as the physical market continues to be so thin and the industrial demand drives on. I am interested in flipping silver for gold, but 65-77:1 is too high for me. I am looking for mid 50's ratio to be my trigger point. While more unlikely to reach that level - I have no need to trade just for fun.

sincerely, @cluelessinvestor - aka a random nobody on the internet spewing nonsense

This post NOT financial advise, it contains my personal opinion and experience and is intended for educational purposes. Perform your own research and analysis prior to making investment decisions.

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