2185 14
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.


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%).
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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Thank you Tim! This is starting now.
Still in time to catch the pair coming to equilibrium?
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.
HI Tim, respectfully disagree, I think we will see 84-100 level
+1 Reply
Any additional thoughts now that it is a month later?
aibek timwest
Hi Tim!

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
Hey Time, great insight. Thank you for sharing and all the BEST :)
excellent studies, great job +A
You love the silver!
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
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