The gold/silver ratio spread can be a costly futures trade. If you are new to futures trading or have a small account, it’s best to start by using mini precious metals contracts - like the mini silver futures (/YI) and the mini gold futures (/YG).
What does the gold/silver ratio represent?
SImply put, the gold/silver ratio represents how many ounces of silver it takes to buy an ounce of gold.The Gold/Silver Ratio Has Changed Dramatically Over Time
If you look over the past 100 years or so, the gold/silver ratio most commonly quoted is 30:1 (it would take 30 ounces of silver to purchase 1 ounce of gold).
Over the past 3 years, the gold/silver ratio has been fluctuating between 35:1 and 85:1 - this is driven by the volatility in the prices of the metals themselves.
Over the past year, the ratio has held pretty closely to a 70:1 ratio.
If we wanted to place a gold/silver ratio trade, we would start by looking to the mini contracts - /YG and /YI.
If you’re not familiar with these futures contracts, here are the specs:
Mini Gold Future (/YG) Specs:
Index Multiplier (leverage) - 33.2 Troy Ounces
Current Price - $1102
Notional Value - $36,586* = ($1102 x 33.2)
Tick Size - $0.10 ($3.32 /tick)
Mini Silver Future (/YI) Specs:
Index Multiplier (leverage) - 1,000 Troy Ounces
Current Price - $14.665
Notional Value - $14,665* = ($14.665 x 1000)
Tick Size - $0.001 $1.00
Because the notional values of /YG and /YI are quite a bit different, we will want to notionally weight them to create a spread trade.
The notional value ratio is $36,586/$14,665, which equates to a ratio of about 2.57(YI):1(YG).
Trading the Gold-Silver Ratio in 2019 - Closing the Gap: Futures Edition
In this instance, you could round up or round down the ratio to 2:1 or 3:1, but for this example, Pete rounds down to a 2:1 ratio of silver to gold (which is a better ratio if you’re trying to keep buying power low).
If we expect the ratio to decrease, then we will buy 2 mini silver contracts and sell 1 mini gold contract.
If you want to place the same trade using options on futures, check out the video to learn how.
Strategies: Futures Spread (Notionally Weighted)
Products Discussed In This Episode: /YG, /YI
*Values subject to change based on where the market is at