How To Profit From The Gold/Silver Ratio

August 2, 2009 | By | Reply More

In the last week the gold / silver ratio has gone from above 71 to around 68, still historically high. At the same time the gold price has yo-yoed between a high of $959 and a low of below $927 an ounce before closing out on Friday at $954 an ounce.

While all this was happening silver was mirroring the performance of gold, with a slight delay, as the price of gold ebbed and flowed. Significantly though, at each daily close, silver’s gain or loss in percentage terms was always greater than its more expensive bedmate and this opens up opportunities to trade silver profitably.

There is nothing new about the greater percentage movements in silver but with the market in gold jumping about as it has done, the fleet of foot can enjoy some profitable trading. The advent of easily traded Silver ETFs, such as SLV, has opened up trading in the previously “closed shop” of the silver market so that short term traders can skim the market just as easily as with any Dow or S & P 500stock.

After a brief period when gold had a mind of its own, it has now reverted to following the price of oil and the US dollar. Oil up, dollar down equals gold up, and vice versa.

If gold breaks out of the lighter summer trading to advance through $960 an ounce by the fall, and, as many think it will, again attack the $1000 barrier, the gold /silver ratio is more than likely to drop through the 65 mark, meaning the profit potential by playing silver will be considerably greater than sticking to gold.

Both metals are historical safe havens and hedges against deteriorating currencies so that does not become a factor to consider.

If you are in the camp that believes the Fed can preserve the value of the dollar and save us from hyper inflation and that the demand for oil will lessen so bringing down the price, then shorting or buying puts in a silver ETF is the play for you. If you are right then the silver drop, percentage wise, will outrun that of gold and the gold/silver ratio will return to the high sixties, early seventies.

Either way, the added silver volatility and the slight lag behind the price performance of gold, oil and the dollar can provide some money making short term trades and if you get it right, some excellent longer term profits.

Of the two longer term plays we are committed to the precious metal bullish scenario and have put our money where our mouth is but having a little fun gambling on the day to day, or even the hour by hour, movement in silver has helped us to while away the lazy days of summer!

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