Precious Metals Fundamentals & Strategy - Ratios
In my previous post, I started talking about how there's usually 3 steps to a precious metals strategy:
- Enter / Buy Strategy
- Hold Strategy
- Exit / Sell Strategy
But before we get started, we need to establish some ground points, in particular, ratios.
RATIOS
A strategy for anything always depends on the results desired. If someone wanted to lose weight and build stamina, they may need to change their diet and exercise routine. To do so, they would consult an expert, in that case, a doctor, a nutritionist, and a personal trainer, each molding a strategy fit for that person in order to help them achieve the results desired: lose of weight and building up of stamina. It's similar when it comes to precious metals such as gold, silver, platinum, etc.
Ratios are absolutely critical when it comes to developing a strategy with precious metals, as well as for knowing, on a day to day basis, how they are doing, whether they are cheap, fair, or expensive.
For example, a ratio I typically look at is the silver to median priced home ratio. What this means is that you take the price of a median home (that’s a typical 3 bed / 2 bath, what real estate agents and investors call a ‘bread and butter’ home), and divide it by the current price of whichever precious metal you want to purchase. For example purposes, lets say that a median home is priced today, May 24, 2017, at about $350,000. The price for a single ounce of silver today is around $17. That means that the ratio for silver / median priced home is $350,000 divided by $17, or it would take roughly 20,588 ounces of silver to buy that home today.
When you look at the history of silver, and the price of median homes, and again apply this ratio formula, you’ll see that at times that ratio has come down to around 2,500, nearly ten times less then where it’s at right now. So a strategy may involve, for example, obtaining 5,000 ounces of silver in order to have the purchasing power in the future for 2 homes. At $17/oz of silver, 5,000 ounces would cost today roughly $85,000. In other words, 2 houses for $85,000 worth of 2017 silver. How can this happen? I’ll explain.
Right now, silver is at a historically low price, while real estate is at a historically high price. Remember that old saying ‘Buy low, sell high?’ Well, this is where it applies. Silver is rumored to have the potential to explode upwards of $100/oz all the way up to $1,000s. Now let’s say that in 5 years, the price of a median home drops to $200,000 from the $350,000 price (hypothetical) right now. Let’s also say that silver goes up to $80/oz for it’s current price of $17/oz. That ratio of silver / real estate would now drop to 2,500, the intended target for purchasing real estate. In that case, silver would have gone up to the upside, and real estate would have dropped, therefore, selling silver at a high price, and purchasing real estate at a low price relative to silver.
DIFFERENT RATIOS
You can literally do a ratio for just about any asset class, or anything that has a monetary value attached to it. You could ratio the number of cars to real estate, or barrels of oil to cars. What it really comes down to, again, is the intended results.
Some of the ratios I look at are:
- Gold / Dow (how many ounces of gold to the points on the dow jones industrial average)
- Silver / Dow
- Gold / Median Priced Home
- Silver / Median Priced Home
- Gold / Silver
- Silver / Barrel of Oil
- Gold / Barrel of Oil
Summary
I hope you found this article informative. If you did, you know what to do! In my next post, I'll get into more of the strategy as far as entering / buying, and how I've come to learn it.
