timwest
Short

GOLD/SILVER RATIO FLASHING A MAJOR SIGNAL

2167 14 37
a year ago
Warning: Severe Hindsight Bias Presented.

Had you followed this simple (in hindsight) strategy to Sell Gold             and Buy Silver             whenever the ratio hit 78 (using XAUUSD             and XAGUSD             ) and then turned around and did the opposite when the ratio hit 52 where you sold all of your silver             to buy gold             , AND if you had started doing this starting in May 1987             when the S&P500             was at 290, you would be far ahead of the S&P500             .

I show all of the trades with a green arrow and label the %change.

What this ratio is telling us now is to SELL ALL OF YOUR GOLD             and BUY SILVER             .

Warning again: Severe hindsight bias.

The losses you can sustain will determine your profit. If you tried to manage your losses to avoid the 25% drawdowns in this strategy, then you likely would be severely lagging the S&P500             . Money management strategies that reduce losses often have the opposite effect of limiting profits (shall I say, reducing potential profits).

See the graph for interesting insights and note the drawdowns on this method versus the S&P500             - hint - the S&P500             had multiple 50% drawdowns and this method had only a couple of 25% drawdowns. Not too bad for a simple technique.

I look forward to your comments.

Tim

8:50AM Wed, Sept 2, 2015 XAUUSD/XAGUSD 78.34 ratio

Notes: Starting from May 1987             with the S&P500             at 290, this method is up 11-fold in value with an equivalent S&P500             level of 3246 had you put all of your money in this ratio. The compounded return over 28 years was roughly 9% versus the S&P             at roughly 7%. The interesting part is that the drawdowns (using total hindsight bias here) were less. I see one drawdown in 1990 where the ratio went against you from 78 up to nearly 100, which is over a 25% drawdown. I see another drawdown in 1998 where you went long at 52 and it fell to 38 briefly for another 25% drawdown. Another in May 2006 from 52 to 44 or 16%. The worst was in 2011 when the ratio fell from 52 down under 32 for a 40%-ish drawdown. All in all, much less drawdown and a 25% higher return (9% versus 7%).
a year ago
Comment: Silver outperformed Gold by 10% at best from the time of this signal. It is bouncing up a bit here, but still looks like the right trade. Sell gold to buy silver. 73.58 last 10/29/2015
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jangseohee
a year ago
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" Money management strategies that reduce losses often have the opposite effect of limiting profits (shall I say, reducing potential profits)" I like this but I need to work on understanding it first.
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timwest PRO moorekapital
a year ago
If you sell losers for money management reasons and then once you are out of your position, the position turns around and becomes a winner, then you have really lost. Many people suffer this reality in trading. People love to put stops WAY TOO CLOSE. You can see on this technique that you have to have wide stops to capture the trades.
+1 Reply
G13Man
a year ago
I am glad you started this from may 1987 instead of sooner when the Hunt brothers tried to corner the silver market , So many people us the valuation of silver from when the Hunt brothers were manipulating the market and that ruins their real world perspective / analyst !
having said that , i still see deflation ,
but like your idea of the use of 2 commodities that do have real world value ! +1
+2 Reply
timwest PRO G13Man
a year ago
Yes - manipulated markets don't give useful signals. I try my best to stay away from severely manipulated markets. We could have a poll here to have everyone vote on what market they think is the most manipulated and then rank them.
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Justiceisfalse
a year ago
You love the silver!
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excellent studies, great job +A
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moneymaking
a year ago
Hey Time, great insight. Thank you for sharing and all the BEST :)
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aibek
a year ago
HI Tim, respectfully disagree, I think we will see 84-100 level
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timwest PRO aibek
a year ago
Any additional thoughts now that it is a month later?
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aibek timwest
a year ago
Hi Tim!
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rangy so far 68.79/84.41
Gold was first to fall on Oct 15, Silver followed only this Friday so the ratio will grow amid catch up
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Victor.Y.F
a year ago
Thank you, Tim. Silver has a negative correlation with euro, it could follow dollar for some time but it's better than gold. I have a long lot now.
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discman24
a year ago
Still in time to catch the pair coming to equilibrium?
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Victor.Y.F
5 months ago
Thank you Tim! This is starting now.
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