Precious Metals Swaps

One of the more interesting long term strategies for investing in precious metals is to trade on the gold/silver ratio.

The strategy is to buy silver with gold when silver is cheap, and then reverse the trade, buying gold with silver, when gold becomes cheap in terms of silver. The ratio of silver to gold has ranged between 40 and 110 over the past 20 years. A year ago the ratio was 39:1, below the 40:1 that has marked the end of the range. It is currently (Jan 9th 2012) back up to 55:1.

So for example you would trade gold for silver when one gold ounce buys 80 silver ounces (the ratio is 80:1). Then when the ratio drops to 40 to one we swap back our 80 silver ounces for 2 ounces of gold, doubling our gold holdings.

Understanding the gold/silver ratio makes possible very profitable arbitrage refinements to the strategy.

Timing is important, when the ratio is relatively high, we favor silver in new purchases. When the ratio is relatively low, we favor gold.

Buy the form of silver that offers a possibility of extra profit. When the silver market gets hot, new investors will be buying US 90% silver coin. That sometimes drives up the premium to 30 or 40% above the silver value. At that point you swap 90% coin for one ounce rounds or 100 ounce bars, and convert that premium to extra ounces of silver.

Play the ratio. When the ratio is high, swap gold for silver, when the ratio drops, swap silver back into gold.

There are risks, you don't know if the ratio will go beyond historical norms, and of course there is the possibility that both gold and silver decline in value.

However, if you have been thinking of swapping gold for silver, silver for gold or even trade one form for another (90% silver into 100 oz bars) then we might be able to take care of that for a very low transaction cost.

Please Email us and let us know what you have and what you want to trade for. We will attempt to work out a swap that hopefully we can all live with.