Gold/Silver Ratio

I was looking at the ratio of the price of gold relative to the price of silver last week. 

Serendipitously, Bespoke offered up a chart of the gold/silver ratio a few days ago.  This is the chart.

I find this chart intriguing.  Going long silver and shorting gold looks like an interesting trade.  The gold/silver ratio is at a decade high. 

However, the chart only goes back 10 years.  Prior to 1998, the the gold/silver ratio was even higher.

This is the ratio since 1984.

 

The current ratio is 77.  Since 1998, the gold/silver ratio has averaged 60.  Since 1984, it has averaged 66.  The ratio hit 99.7 in February 1991.  So the gold/silver ratio is high, but it has gone higher in the past.

I thought about putting this trade on but have opted not to so far.  Buying silver and shorting gold is essentially a beta play on the economy since silver is used in industrial production more so than gold.  If the economy improves and investors regain confidence in asset markets, this ratio will close.  You can get the same beta exposure to the economy by buying stocks.

Thus, though I find buying silver and shorting gold an intriguing arbitrage trade, I have yet to put it on because I do not know any other reason to think it will close other than an eventual return of confidence to the asset markets.

Comments

[psychodave]

"I thought about putting this trade on but have opted not to so far."
Since everything I've read and seen indicates this recession will be significantly worse than the 1990-1991 recession, why not postpone until the ratio is even higher than 1991's 99.7:1?

thesis: manufacturing demand for silver declines in proportion to recession depth

Agree fully with your "same beta exposure" and "return of confidence" conclusions.

Off Topic: Christmas holidays in Kitty Hawk, NC are vindicated by really good raw oysters, at $0.50/each, and the best gift I received, to wit:
The beam of joy that flashed on the wife's face when she glimpsed Stella Artois on Awful Albert's menu.

[Running Amok In Fantasyland]

When there was confidence in markets, very few knew what was wrong so nothing was being done about it.

Now that almost everyone knows what is wrong, everything is being done about and very few have confidence in markets.

Makes me want to reach for my astrology charts.

Hey! They say big rally in first half after short, nasty selloff!

Finally, clarity.

[psychodave]

"Finally, clarity"
appropriate acidity can make a good buffer. I.e., enjoyed your comment.

[Shankar Khadye]

Running Amok,

Out of curiosity, what astrology charts are you reaching for?

[alan smithee]

running amok, nobody should have more than limited confidence in the asset markets until the cycle of deleveraging and deflation have ended. then, only when the US has rebuilt manufacturing capacity will the us be able to support its markets. all that said, i am sure that we will have many things surface over the next 5 years that will enable the us to survive and will be markedly different than what anyone is expecting. and i am sure that the guv intervention will not have much to do with any of this survival/success.

as it currently stands, we are likely just rallying in a rising range until the next bear raid. rinse and repeat until the strong companies sop up the defeated and crush the shorts. isn't that how it usually works? given the need for debt destruction, I'd think that we'll have a different dynamic from the 70s where stock was used as currency. instead, it would be logical for stronger companies to expand through the debt markets, right?etc

[jc]

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