Apart from trading currencies, I’m also very much interested in commodities. I’m not as active there as in Forex, no day trades in oil or corn, but I check news and price changes daily. From time to time, when right situation presents itself, I take a trade. These days I don’t look at charts smaller than daily and most likely weekly. Also, my interest is only in commodities, not financial futures.
Until recently the only way to invest in these markets was using futures brokers. Over last few years, though, many ETF’s and ETN’s tracking prices of commodities emerged. It is very easy to use them, one can buy and sell them like stocks. Probably the best feature of using these new instruments is that they can be traded in any size, not just standard contracts, like futures. This means that even holders of small accounts can profit from commodities.
Recently some Forex brokers added precious metals to markets available for trading. Both silver and gold are offered on some platforms and can be traded just like currencies, where the user can define his own leverage. I find spreads a little too rich for day trading, comparing to futures exchanges, but great for longer term action.
At this time I’m looking at longer term metals charts, and think that gold is overpriced in relation to silver. This is expressed as a gold to silver ratio, a measure of how many ounces of silver it takes to equal price of one once of gold. Currently it is about 70, which is not extreme, but still historically high. While both of these metals are considered precious, they do behave differently and often are subject to varied fundamentals. Gold is seen more as a safe haven, storage of wealth, while silver is becoming more and more an industrial metal, due to increased number of uses.

Gold has been falling for better part of 2008, until global crisis broke out in full. From October 2008 it benefited from the “flight to quality”, or panic, which sent the price of gold back to $1000 level. It retreated since then, but once again has been rising of late, in less dramatic fashion. Volatility of other financial markets has subsided, which would limit farther appreciation of gold, or at least, slow down the pace dramatically. If that is the case, silver could have far better return potential.

Silver depreciated far more in 2008 and didn’t recover as much as gold during the panic later that year. This led to widening of the gold to silver ratio to a very high level of 82. It has subsided since then and I think it will get lower over time.
There are many reasons why silver should gain value in relation to gold. Supply/demand story of silver is much more convincing. Should world see some recovery soon, wide usage of silver in many industrial application will keep demand high. Since 2000 production of silver increased by about 20%, while consumption rose by 44%, according to Silver Institute. This is not sustainable without dramatic price rise. On the other hand, if the economic down turn continues, silver is also in an unusual supply situation. Most silver in the world is produced as a by product in mining zinc and copper, rather than dedicated silver mines. Should production of base metals slow down, this will put immediate pressure on silver supply, maintaining or increasing its value. Recently large coin dealers have reported inability of maintaining and acquiring normal levels of silver coins in stock, leading observers to believe that silver, in physical form of coins, is being horded by individuals.
My intention is to sell gold and buy equal dollar amount of silver. Intention is to hold for some time, until the ratio narrows. How long would that be?

Here is chart of gold-silver ratio since early 70′s, with silver price.  Ratio scale is to the right.  As we can see, an average level would be about or just under 50. This will be my target and I think it could be reached before 2009 is over.
My trade is designed with an expectation that silver will outperform gold. If metals advance, silver will rise faster. Should they decline, gold will see quicker depreciation. Risks are very small, trade is of low maintenance variety. Enough to check it once a week. The key now is to be patient, leave it alone for some time, and let silver shine.

Mike K.