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%).
having said that , i still see deflation ,
but like your idea of the use of 2 commodities that do have real world value ! +1