Gold and Silver Ratio - Jan 2011[1]

8/6/2019 Gold and Silver Ratio - Jan 2011[1]

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Gold and Silver Ratio Analysis

JRG Research Publication

What is ratio?

Ratio is a tool used for understanding the comparative performance of two separate

investments. In case of gold to silver ratio, when the ratio rises it connotes a better

performance of gold as compared to silver and a dip, on the other hand, shows weakness in the

yellow metal as compared to its counterpart.

How to arrive at the ratio?

Gold to silver ratio is simply the quotient of the price of gold to silver, where the amount of

gold sold or purchased should be the same as silver sold or purchased. For instance, if gold

trades at $1000 per ounce and silver at $20 per ounce (note: both gold and silver prices are for

one ounce) the ratio will be $1000/$20 = 50.

The analysis primarily consists of two studies:-

1. Where the ratio is at, as compared to its historical average and extremes2. Other is how the ratio has behaved when exposed to various economic cycles and

milestones over the years.

Even though the ratio is basically a technical indicator, the rate always gyrates under the

influence of the underlying fundamentals of gold and silver.

Chart 1: Gold silver ratio

20 Jan 2011


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Gold to silver ratio rose continuously for almost 10 years (1983-1992), from the historic low

near 30 levels to the historic high of near 100. The ratio peaked near 100 during 1990s when

following the economic downturn that persisted at the time.

However, the prominence of trading silver climbed and helped the white metal to catch up with

gold, resulting in it pulling the ratio down significantly. Gold to silver ratio fell by more than 50

percent to hit 45 for the first time during 1998 after climbing towards the historic high.

However, the ratio has remained above 45 till date.

The ratio has been treading in a wide range of 80-45 since the year 1995 and has touched the

lower limit of the range three times post 1995. The third attempt of to reach down to the 45

level was during end of 2010. The price ratio touched climbed near 80s on two occasions, both

during the thick of economic crisis. The last time it rose was during the 2008, when the globaleconomy witnessed recession, which was described as the worst one since the Second World

War.

Recent Silver price run-up

Silver prices have exacerbated during the year 2010 resulting in it gaining almost 75 percent

from its previous years closing price. Gold on the other hand closed with 28 percent gains

behind it as compared to silvers 75 percent.

Chart 2: Silver and gold prices

400

600

800

1000

1200

1400

1600

7

12

17

22

27

32

37

1/7/2007 1/7/2008 1/7/2009 1/7/2010 1/7/2011

Rapid Run up in silver prices in the H2 of 2010

Silver

Gold


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Effectively, silver prices are expected to fall quicker than that of gold and thus buying gold

and selling an equivalent amount of silver would be the ideal exposure in order to

utilize the recovery in gold to silver ratio.

Ratio Vital Stats (last 28 years)

Mean 64.69

Median 65

Standard Deviation 13.10

High 2/22/1991 101.06

Low 5/31/1983 32.17

Table 1: Gold and silver prices at different ratios (International prices)

Ratio 51 50

(Expected)

49 48 47.93

(Current

ratio)

46 45 44

(Risk)

43

Gold

($/Ounce)

Silver ($/Ounce)

1310 25.69 26.20 26.73 27.29 27.33 28.48 29.11 29.77 30.47

1330 26.08 26.60 27.14 27.71 27.75 28.91 29.56 30.23 30.93

1350 26.47 27.00 27.55 28.13 28.17 29.35 30.00 30.68 31.40

1355 26.57 27.10 27.65 28.23 28.27 29.46 30.11 30.80 31.51

1365 26.76 27.30 27.86 28.44 28.48 29.67 30.33 31.02 31.74

1400 27.45 28.00 28.57 29.17 29.21 30.43 31.11 31.82 32.56

1420 27.84 28.40 28.98 29.58 29.63 30.87 31.56 32.27 33.02

1440 28.24 28.80 29.39 30.00 30.04 31.30 32.00 32.73 33.49

1460 28.63 29.20 29.80 30.42 30.46 31.74 32.44 33.18 33.95

The above the table shows the price of silver ($/oz) at different ratios. The cells in blue connotethe current scenario. When the ratio was 45 and the gold is at 1385, the corresponding silver

price is at 30.78. (1385/30.78=45).


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Table 2: Gold and silver prices at different ratios (MCX prices)

0.5 0.49 0.48 0.47 0.46 0.45 0.44 0.43 0.42

Gold

(Rs/10Gms)Silver (Rs/kilo)

19900 39800 40612 41458 42340 43035 44222 45227 46279 47381

20000 40000 40816 41667 42553 43251 44444 45455 46512 47619

20100 40200 41020 41875 42766 43467 44667 45682 46744 47857

20200 40400 41224 42083 42979 43684 44889 45909 46977 48095

20300 40600 41429 42292 43191 43900 45111 46136 47209 48333

20400 40800 41633 42500 43404 44116 45333 46364 47442 48571

20500 41000 41837 42708 43617 44333 45556 46591 47674 48810

20600 41200 42041 42917 43830 44549 45778 46818 47907 4904820700 41400 42245 43125 44043 44765 46000 47045 48140 49286

The above table shows the prices of silver (Rs/kg) at different ratios. The cells in the blue

connote the current scenario. When the ratio is 0.45 (price of gold/price of silver) gold is at

20470 and the corresponding silver price is at 45370. (20470/45370 = 0.45). The trader is

expected to execute the position of selling silver and buying gold at the current scenario, with

the expectation of the ratio of move up from 0.45 to 0.50 levels.

Table 3: Unit gains or losses of gold and silver

0.5 0.49 0.48 0.47 0.46 0.45 0.44 0.43 0.42

Gold P/L

(Per lot)Silver gains (per lot)

-400 4100 3288 2442 1560 865 -322 -1327 -2379 -3481

-300 3900 3084 3084 2233 649 -544 -1555 -2612 -3719

-200 3700 2880 2025 1347 433 -767 -1782 -2844 -3957

-100 3500 2676 1817 921 216 -989 -2009 -3077 -4195

0 3300 2471 1608 709 0 -1211 -2236 -3309 -4433

100 3100 2267 1400 496 -216 -1433 -2464 -3542 -4671

200 2900 2063 1192 283 -433 -1656 -2691 -3774 -4910300 2700 1859 983 70 -649 -1878 -2918 -4007 -5148

400 2500 1655 775 -143 -865 -2100 -3145 -4240 -5386

The above table shows the units gains or losses of gold and silver at different ratios. The unit

gains or losses correspond to the figures from Table 2. The green cells denote the time of

triggering the ratio trade.


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For Executing the Ratio trade: THE TOTAL INVESTMENT IN PURCHASING GOLD SHOULD BE

EQUAL TO THE TOTAL INVESTMENT IN SELLING SILVER

Price/10gms Contract Size Contract Value

Gold 20430 1 Kg 20430*100 Rs.2043000

Price/5 Kg Contract Size Contract Value

Silver 44700 30 kg 44700*30 Rs.1341000

The ratio of the contract value of gold to silver comes to 2043000/1341000 = 1.52

This means that 1 gold contract is approximately equal to 1.5 contracts of silver

No of Gold

contracts to be

Bought

No of silver

contracts to sold

1 1.52

2 3.04

Investment Strategies

In the light of the factors Mentioned above, the ratio of gold to silver is expected to touch near

50 levels. To utilize this rise one shouldBuy gold and Sell silversimultaneously.

Strategies lots Margin per lot Total Margin Amount

1*

Gold Kg 2 81000 162000

Silver Kg 3 70000 132000

2

Gold mini 10 6000 60000

Silver Mini 11 11100 122100

3

Gold Guinea 1 650 650

Gold mini 1 6000 6000

Silver mini 1 11100 11100


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*Example:-

Buy MCX Gold Feb 2 Lot @ 20350 and Sell MCX Silver Mar 3 Lot @ 43950

Note:

Price of MCX Gold and Silver are 20300 and 43900 respectively The current ratio (MCX Gold/Silver) is at 0.46 (corresponding Spot gold/silver ratio is

47.85) and the risk arise if ratio fall below the 0.44 (corresponding Spot gold/silver ratio

is 45.00), one can exit their positions.

The contracts rollover may required and currently USDINR is at 45.50References:

The payoff matrix for each strategy has been calculated below. The payoff matrix does not

represent the actual profit and loss situation and it has been incorporated for the purpose of

reference only.

Strategy 1: Buy 2 Gold and Sell 3 Silver

0.5 0.49 0.48 0.47 0.46 0.45 0.44 0.43 0.42

Gold P/L

(Per 2 Lots) Silver P/L (per 3 lots)

-80000 369000 295898 219750 140362 77852 -29000 -119455 -214116 -313286

-60000 351000 277531 277531 201000 58389 -49000 -139909 -235047 -334714

-40000 333000 259163 182250 121213 38926 -69000 -160364 -255977 -356143

-20000 315000 240796 163500 82915 19463 -89000 -180818 -276907 -377571

0 297000 222429 144750 63766 0 -109000 -201273 -297837 -399000

20000 279000 204061 126000 44617 -19463 -129000 -221727 -318767 -420429

40000 261000 185694 107250 25468 -38926 -149000 -242182 -339698 -441857

60000 243000 167327 88500 6319 -58389 -169000 -262636 -360628 -463286

80000 225000 148959 69750 -12830 -77852 -189000 -283091 -381558 -484714


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Strategy 2: Buy 11 Goldmini and Sell 10 Silvermini

0.5 0.49 0.48 0.47 0.46 0.45 0.44 0.43 0.42

Gold mini

P/L (11 Lots) Silver mini P/L (10 Lots)

-44000 205000 164388 122083 77979 43251 -16111 -66364 -118953 -174048

-33000 195000 154184 154184 111667 32438 -27222 -77727 -130581 -185952

-22000 185000 143980 101250 67340 21626 -38333 -89091 -142209 -197857

-11000 175000 133776 90833 46064 10813 -49444 -100455 -153837 -209762

0 165000 123571 80417 35426 0 -60556 -111818 -165465 -221667

11000 155000 113367 70000 24787 -10813 -71667 -123182 -177093 -233571

22000 145000 103163 59583 14149 -21626 -82778 -134545 -188721 -245476

33000 135000 92959 49167 3511 -32438 -93889 -145909 -200349 -25738144000 125000 82755 38750 -7128 -43251 -105000 -157273 -211977 -269286

Strategy 3: Buy 1 lot Goldmini and 1 lot Gold Guinea; Sell 1 Silvermini

Gold

mini P/L

(1 Lot)

Gold

Guinea

P/L

(1 Lot)

Total

P/L0.5 0.49 0.48 0.47 0.46 0.45 0.44 0.43 0.42

Silver Mini P/L (1lot)

-4000 -400 -4400 20500 16439 12208 7798 4325 -1611 -6636 -11895 -17405-3000 -300 -3300 19500 15418 15418 11167 3244 -2722 -7773 -13058 -18595

-2000 -200 -2200 18500 14398 10125 6734 2163 -3833 -8909 -14221 -19786

-1000 -100 -1100 17500 13378 9083 4606 1081 -4944 -10045 -15384 -20976

0 0 0 16500 12357 8042 3543 0 -6056 -11182 -16547 -22167

1000 100 1100 15500 11337 7000 2479 -1081 -7167 -12318 -17709 -23357

2000 200 2200 14500 10316 5958 1415 -2163 -8278 -13455 -18872 -24548

3000 300 3300 13500 9296 4917 351 -3244 -9389 -14591 -20035 -25738

4000 400 4400 12500 8276 3875 -713 -4325 -10500 -15727 -21198 -26929

DISCLAIMER

This research report is prepared by JRG research. The report is only for the purpose of use by the recipient and should not be

circulated or copied without the prior permission of the company. The views expressed in this report are based on the analysis

of data and information obtained from sources we consider reliable. However, the company takes no responsibility for the

accuracy and completeness of any such data or information. Investors may note that neither the company nor any persons,

associates or any subsidiaries accept any responsibility for any potential loss arising as a result of use of the data, information or

views expressed in this report. The recipient is requested to seek independent expert advice prior to acting on this report.

Documents

Gold and Silver Ratio - Jan 2011[1]