Gold has been in the news a lot lately. Reasons are many and varied, but mostly because it is around historically, and psychologically, important level of $1000 per ounce. This alone creates tremendous buzz among both media and investors. One can’t avoid hearing and reading about. My personal interest is in precious metals is two pronged: I just closed my gold-silver trade, which lasted few months, a long time for me. Second reason is in the fact that gold is continually used as some kind of proxy for US Dollar, bringing it into sphere on interest for currency traders like myself.

Testing of highs from last year, the $1000 level, comes at very peculiar time. September the 24th market 140th anniversary of market panic in 1869, which was caused by wild price swings in gold. Group of speculators, including Jay Gould and James Fisk, attempted to corner the gold market. Price jumped by about $20 dollars in one day, to a high of over $162, huge swing for that time. In response, federal government flooded the market with metal, crushing the prices to $133 within 15 minutes. Many investors were wiped out, banks failed and country was tossed into depression lasting until 1871. All this time has gone by and not too much has changed- gold is flirting with all time highs, speculators keep trading and government still keeps intervening. Maybe not gold, but financial markets at large. Funny, isn’t it?

All time high in any market certainly deserves attention. It is even more pronounced with gold, which has been a measure of wealth since beginning of civilization. However, is it really an all time high? How does it compare to past prices, adjusted for inflation? Or levels before the great finds of 19th and early 20th century produced great quantities of the metal? I found this strange chart of gold, going back to 1344(!?). It is not up to date, only through 1998 and past prices are expressed in 1998 dollars. Not sure how values for the early part of the chart were derived, but find this graph interesting.

Seems that an all time high for gold happened about the time Columbus discovered America, and was about $2400 per ounce in 1998 dollars. That would be what today, in 2009 even more diluted USD,about $3500? Guess current prices have long ways to go… Here is similar chart for silver, spanning the same time frame. This one also includes gold-silver ratio over the years, well, centuries, and starts in 1344 as well. Data for earliest part is more detailed here, since silver was the primary medium of exchange and wealth storage in medieval Europe.

Here also market is nowhere near all time high, and unlikely to get there soon. In reality, though, these charts, as interesting as they are ( the longest term I’ve ever seen), should be treated as novelty items, not any guidance. But there is a small lesson here. Many people subscribe to buy and hold mentality, believing that over time markets return to past high levels. In this case they’d be holding on for centuries. I doubt this fits into anybody’s long term outlook. This means stops, always use at least mental stops, even without leverage. Markets can easily turn against us for much longer than one could anticipate.

My trade in in gold-silver was based on price ratio of these two metals and was not a directional bet, but a spread. This means I sold gold and bought silver, betting that the later would either appreciate in value faster than the former, or decline slower, should both markets collapse. From the beginning risks were fairly limited, since neither asset is likely to decline to zero. At the time of entry, the ratio was a little over 66:1. so fo every ounce of gold sold, 66 ounces of silver were purchased. Objective was to hold it until the ratio dropped below 60, maybe even 55.
Here is a chart of gold. Snap shot was taken on Wednesday, just before trades were closed.

And silver

Original trade consisted of selling 100 oz on gold and buying 6600 oz of silver. It went really good for a few days, producing decent gains and moving to just above 60 ratio. Then it turned around. At about the entry level I decided to double my exposure. Trade went into negative territory for some time, but eventually, and very slowly, moved my way and produced good enough profit to close it. Somewhat short of the hoped for 55 ratio although it dropped to under 60.

Graph of the ratio shows that last couple of weeks silver appreciated much faster than gold, pushing the ratio lower. By the way, this can be analyzed just like price chart, with highs/lows, MA’s, indicators etc. Incidentally, this is also true for account equity line(could be graphed and subjected to technical analysis) and can be a very powerful tool. Vast subject in itself, I’ll go over it some other time. Speaking of equity, here are the results in pips, well, ticks.

The silver part of my spread produced about 52,000 ticks gain, while gold lost about 15,000 ticks. While they were of different value, this translated to profit of about twice the margin used  and more than twice maximum draw down suffered during holding period. Not bad. I really like these kind of trades, but they don’t happen very often. Can only hope another similar situation comes along soon. Real soon.
I’m going on a trip for a couple of days, so there will be no update on Sunday. Don’t know about Monday, but given my really strange sleeping patterns, could find myself writing something then . Should be back by Tuesday.

Mike K.
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