By having the long-term history available in all of the major markets, the ratios between those markets provide us with important reference points, alerting us to situations when one asset or market is overvalued or undervalued relative to another. On a macro level, this can result in a determination that raw commodities will provide a greater opportunity for wealth building than traditional investments in the stock market or vice versa. One can make a number of amazing observations when privy to these long-term histories. Shifts in the major asset groups typically occur only once every generation. In addition, such shifts may occur at historic extremes not seen in as long as 60 years.
For example, looking at the gold/silver ratio since 1910, we find the value of gold versus silver has varied widely throughout history (Chart below). In January 1920, one ounce of gold was worth 15.56 ounces of silver. In August 1942, one ounce of gold was worth 102.5 ounces of silver. In other words, gold appreciated significantly relative to silver. After establishing this high, the ratio declined for 26 years. In June 1968, it returned to its long-term support at the 1920 low. This in turn sparked a 23-year advance that returned the gold/silver ratio to its 1942 high. Based upon this chart, it becomes apparent there are times when distinct preference should be given to one market over the other.
Given the current trend, it appears to be wise to be Long Silver instead of Gold .. and to lower Trade risk, Short Gold while going Long Silver to create a Spread. Should ALL precious metals rise, you would still Profit from rising Silver .. however, should all Precious Metals fall, your losses would be minimized and you might even have Profits from your Short Gold position.
A Spread position may lower your Profits, but it can also lower your losses if wrong . . . and there is always the possibility of increasing Profits more than without the Spread by being correct on BOTH sides . . . Silver moving higher AND Gold moving lower!
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