A burgeoning story in the trading world is none other than silver, which recently clocked an 11-month high and is now up roughly 23% on the year.
Gold, a highly-correlated precious metal, isn't far behind - rising about 18% so far in 2016.
If you haven't been following the meteoric rise of these two rockin' companions, now might be a good time to tune in.
Precious metals are often viewed as "safe haven" investments during periods of uncertainty and volatility - generally when global equity markets are losing ground. Given that 2016 started with a steady decline in equity prices, it wasn't too much of a surprise to see gold and silver catch a bid off multi-year lows in the early part of the year.
However, after global equities rebounded from February, silver and gold have maintained their lofty levels, which may be due to a more dovish stance from the United States Federal Reserve (and other central banks). The expectation for fewer interest rate hikes this year (correct or not) has catalyzed a slight pullback in the value of the greenback, which has contributed to the boost in commodity prices (like precious metals).
We featured the gold and silver trade on the blog and introduced the gold/silver ratio, which is the amount of silver it takes to buy one ounce of gold. This ratio is calculated by dividing the current price/ounce of gold by the current price/ounce of silver.
At the time, we highlighted the fact that the gold/silver ratio was at a high level (78) based on its historical chart, as shown below:
Furthermore, it was noted that traders expecting the gold/silver ratio to revert to the historical mean might then sell gold and buy silver to express this view. An episode of Market Measures from earlier this month demonstrated how this trade could be deployed using precious metal ETFs (GLD, SLV).
Interestingly, in recent days, the gold/silver ratio has indeed shrunk - meaning that those traders deploying the structure that effectively bet the gold/silver ratio would revert to the mean have been winning (for now).
On April 12th, gold was trading $1260/ounce while silver was trading $15.91/ounce. Using those values, the gold/silver ratio that day was 79.2 (1260/15.91).
As of April 19th, gold had traded down to $1254/ounce, whereas silver had increased to $16.97/ounce. Consequently, the gold/silver ratio had decreased to 73.9 - only five trading days later. In that span, traders expecting the ratio to go lower that sold gold and and bought silver (in the appropriate proportion) had executed a winning trade.
While there's no telling where the price of gold and silver may go in the coming days and months, the gold/silver ratio may present an opportunity for traders to express a view on the sector.
Please don’t hesitate to reach out with any comments or questions to firstname.lastname@example.org.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.