The above graph of the ratio (weekly data) shows an idealized scenario for trading between gold and silver. Buy gold when the ratio is low and silver is relatively expensive. Sell gold when the ratio is high and silver is relatively inexpensive. The red arrows show 13 trades since 1971 that could have drastically increased total ounces in your metal stacks.
Begin in 1971 with $1,000 invested into gold – 23 ounces. Trade back and forth between gold and silver. By late 2018 your $1,000 in gold grew to over 177,000 ounces of silver, worth over $2,000,000 in a perfect trading world.
These theoretical trades were executed with perfect hindsight – about as likely as:
· Everyone is above average.
· The wind is always at your back.
· Politicians are truthful and care about you.
· Central bankers are good-hearted souls motivated to protect the best interests of common people.
· Debt and deficits don’t matter.
· The COMEX is an honest physical exchange.
IN A MORE REAL WORLD:
· The future is unknowable.
· Timing a market is difficult.
· Greed and fear inhibit making good decisions.
· Trend changes are difficult to see in real time.
· All markets are manipulated.
· Every transaction includes a cost.
TRADING IS BENEFICIAL EVEN IN THE REAL WORLD!
· Buy silver when the ratio is high—40s before 1980 bubble and over 60 after the 1980 bubble. Sell silver and buy gold when the ratio is low—below 30 before the bubble and below 50 after the bubble. AND…
· Calculate the five week moving average of the ratio. Trade positions only after the ratio has FALLEN BELOW moving average highs or CROSSED ABOVE moving average lows in the ratio. AND…
· Calculate the 12 period Relative Strength Index
(RSI). Trade positions only after the RSI has reached extreme levels—below 25 or above 75—and reversed. AND…
· Assume each trade costs 5 percent in transaction expenses.
· Taxes on income are NOT considered.
This simple trading strategy is less emotional because it’s mechanical. Many other sophisticated systems are possible.
Using this simple system the trades are: