What on earth just happened to silver?

Silver stunned the world this week as gold continued its bearish correction. How should we consider the relationship between these two metals?

Precious metals were front-page news this week.

Nearly every major news source featured a story about silver, convincing investors that the famous WallStreetBets community was attempting to execute a #silversqueeze. Many investors acted on this news – purchasing huge amounts of silver, skyrocketing the price, and causing a shortage at many brokerages.

However, many members of the WallStreetBets community claimed they were entirely uninvolved with the attempted silver squeeze. Some even speculated that the silver story was planted by large hedge funds and banks to distract from the GameStop hype. We’re not here to entertain any conspiracy theories, but the battle between the billionaires and the retail investors is certainly a fascinating one to watch.

Either way, silver’s heyday was short-lived. It soared from $25 to $30 in a matter of a few trading days, a volatile swing that pushed the price of silver to an 8-year high. On Monday alone, silver climbed from a low of around $26.05 dollars and a high of $30.43, and then immediately dropped back to where it started the surge.

The debacle sent silver into an extremely volatile trading session, but ultimately had little impact on the metal’s long-term outlook. Silver barely even broke through its trading range. Without any major deviations from the expected price movement, silver is expected to continue its long-term bullish trend.

Let’s talk about ratio trading.

Precious metals investing opens up a new frontier of unique strategies that are unavailable in other asset classes. One of these strategies is called ratio trading, which involves trading assets based on their relation to other assets instead of their spot price in U.S. Dollars.

In this blog, we refer to the value of assets in terms of U.S. Dollars. But that is not the only way to determine value. Precious metals’ spot prices rise and fall just like any other asset, but they also rise and fall in relation to each other. Since precious metals serve as currencies, you can reliably determine whether silver is overpriced or underpriced based on its ratio to the gold price.

With a ratio trading mindset, you are asking two questions:

  1. How many ounces of silver can I currently buy with an ounce of gold?
  2. How does this ratio compare to the historical relationship between silver and gold?

The ratio trading mindset opens a whole new world of possibilities for investing. Instead of trying to time the market, you can simply exchange overvalued metals for undervalued metals, and then exchange again once the ratio is corrected.

Below is a chart of the gold to silver ratio over the past couple of years. Silver was extremely undervalued this summer. The gold-to-silver ratio reached an all-time high in March, which presented a great opportunity to exchange a portion of your gold holdings for silver. Now that the ratio is correcting back down and approaching the historical average, a ratio trader might start trading some of that silver back into gold. You end up with more ounces of gold without ever having to invest another dollar!

Ratio trading requires expertise but is extremely reliable and lucrative. Your Vaulted advisor can walk you through these strategies and help you take full advantage of your precious metals investment.

What does this mean for gold?

Gold took a heavy hit this week. The short-term bear market continues to put pressure on the price, although gold still has not dropped below the seasonal bottom last November. The long-term fundamentals remain bullish for gold, but we need to break out of this painful pattern before continuing upward. The price movement in the next couple of months will give us a better idea of what the long-term bull market has in store.

Gold’s price action over the last few months has provided many great buying opportunities. We don’t know what will happen to the price of gold, but the economic fundamentals make a strong case that gold is in its third great bull market of history. But hold on – if we’re in a bull market, why isn’t the price shooting up?

Gold’s price movements are often more drawn out than stock price movements. Everyone knows (or should know) that stock market corrections can be devastating. They seem to happen overnight, wiping out years of positive returns in a matter of weeks or days. Corrections in precious metals markets often much last longer, taking months to reach the bottom.

A months-long downward trend does not indicate the end of a bull market. Everyone wants explosive short-term gains, but truly great investors ignore this impulse. Successful investors build wealth over the long-term, focusing on consistent performance over a lifetime. That kind of performance is where gold thrives. Believe it or not, gold has outperformed the S&P 500 index by more than 300% this century (since 2000).

How should I react?

The ratio trading concept is something to remember. If you want to learn more about how ratio trading works, give your Vaulted advisor a call! Setting up an account is free, and every Vaulted investor is assigned a precious metals expert to help with entry/exit points, ratio trading strategies, and portfolio guidance.

Gold is an essential component of any healthy portfolio, and Vaulted is the best way to acquire it. We can walk you through how to build your precious metals exposure with full liquidity, personalized advising, and the most affordable cost structure in the industry. Now is the perfect time to start investing in gold. Hope to hear from you soon!