METALS
The Gold/Silver Ratio:
While the financial media tends to focus its discussion on gold, serious investors are also ...
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The Gold-Silver Ratio

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While the financial media tends to focus its discussion on gold, serious investors are also interested in silver. One “tool” historically used by hedge funds and precious metals trading desks to monitor the direction of both gold and silver is the gold/silver ratio.
Traders and prognosticators alike look at this ratio for various reasons, but at the end of the day it simply provides insight into how the price of silver is behaving relative to the price of gold. Although both gold and silver are deemed “Precious” metals, gold is also seen as a form of currency and safe haven in times of political uncertainty where silver is increasingly used as an industrial metal. These distinctly different fundamentals can, at times, make this a dynamic market to watch/trade.

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The Gold-Silver Ratio

  1. 1. METALS The Gold/Silver Ratio: While the financial media tends to focus its discussion on gold, serious investors are also interested in silver. One “tool” historically used by hedge funds and precious metals trading desks to monitor the direction of both gold and silver is the gold/silver ratio. Traders and prognosticators alike look at this ratio for various reasons, but at the end of the day it simply provides insight into how the price of silver is behaving relative to the price of gold. Although both gold and silver are deemed “Precious” metals, gold is also seen as a form of currency and safe haven in times of political uncertainty where silver is increasingly used as an industrial metal. These distinctly different fundamentals can, at times, make this a dynamic market to watch/trade. Choosing a vehicle to express your opinion on the relative value of these two metals is not as simple as it seems. Traditionally traded through forward contracts one not only had to settle on price, but also had to calculate the overnight lending rate to determine the cost of capital used to fund the position. PM1000/00/0314 CME Group is a trademark of CME Group Inc.The Globe Logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. ClearPort, New York Mercantile Exchange and NYMEX are registered trademarks of the New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. The information within this document has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions.Although every attempt has been made to ensure the accuracy of the information within this brochure, CME Group assumes no responsibility for any errors or omissions.Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and NYMEX rules. Current rules should be consulted in all cases concerning contract specifications. Copyright © 2014 CME Group.All rights reserved. How the world advances As firms become increasingly sensitive to capital requirements COMEX futures are now viewed as cost effective alternative to OTC cash markets. As seen in the charts above, a 1:1 spread of front month April gold (GCJ4) against May Silver (SIK4) is highly correlated with the underlying cash market and as a trading vehicle, futures have distinct advantages over Forwards, ETFs etc. • Cost effective – Inexpensive to execute cost of carry embedded into futures price • Highly liquid – Broad participation generating 150K ADV in gold 50K ADV in Silver • Electronically traded – 95% electronically executed • Centrally cleared – Safe, fair and transparent marketplace • Capital efficient – 75% margin offset available between gold and silver futures So if you have an opinion on the direction of gold relative to silver, you might want to consider executing the trade using COMEX Gold and Silver Futures available from CME Group, the world’s leading derivatives marketplace. Cash Market Gold/Silver COMEX GCJ4/SIK4 70 65 60 45 50 55 3/2012 9/2012 3/2013 9/2013 3/2014 70 65 60 45 50 55 3/2012 9/2012 3/2013 9/2013 3/2014 Source: Bloomberg

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