Gold vs Silver correlation/divergence trading? does anyone trade either Gold or Silver by getting set-ups from the other? Do you find that Gold or Silver leads? Example: Gold is soaring, Silver is lagging...means Gold will 'float' back to the reasonable level where Silver is at? Any strategies to trade Gold or Silver using the other metal as an indicator... Very intersting..there has to be some 'trade secrets' there...
Silver is too volitile to pair with anything in my opinion. But if i was to pair silver with gold, I would make sure I was long silver, as the natural ratio of gold to silver in the ground is 17.5 to 1, but for some reason the markets price it as anywhere from 50-1 to 70-1. Right now its about 66-1. Also if you look at silver supplies, you see a deficit in silver stockpiles every year. It is possible that we might actually run out of silver in a few year and all those banks like HSBC that have 30,000 short silver contracts will have to buy them back because they cant deliver. The price of silver will skyrocket.
Beware, IncreaseNow. You are actually trying to find reasons to enter a trade instead of just evaluating the tick value/margin/range of an instrument. That's just not you. No BANG! trading here.
Gold is probably the premiew flight-to-quality instrument these days, so it makes being short Gold and long anything else (including silver or platinum) a dicey proposition when the stock market is under stress. The fact that you have many players who are not routine metals traders reaching into the offer side of the order book for size introduces some 'tail risk' into hedged positions featuring short gold legs. I have no doubt that there are armies of traders trying to pick off any precious metals resting orders based Gold price action, and surely some of it is automated.
I trade Gold and Silver individualy (mostly gold) but never together in some strategy. Money flows in and out of these instruments and impact other markets like Forex so I follow them religously. Nevertheless, I've heard of a strategy that goes something like this. 1.) Compile an index between the two metals (Gold/Silver = Index) 2.) When the index gets too high - Sell Silver and Buy Gold. 3.) When the index gets too low - Buy Silver and Sell Gold. You can slap a set of BollingerBands on the index to /with 1-2-3 SD's to help determine when the index gets too high/low. Attached is a chart showing what I am talking about. I remember checking out a few setups and I believe this system can be profitable. I will look further into this system as I also believe I can maximize profit by checking out the index to determine what is best instrument to trade Gold or Silver against other markets.
1. You are trading cash or futures? 2. Do you have reasons based upon fundamentals to believe in the profitability of such mean-reverting trades? 3. What should be the equilibrium value for such a ratio?
Like I said, I don't trade the system described in my first post, I've just heard of it. I trade silver and gold in both spot and futures. I typically trade gold based on fundmentals and silver mostly on technicals. If I traded such a system I would use the spot market so as to easily trade the equal value ratio. In response to your second question; which I think is a good one, I am not aware of any fundamentals as to why this system would be profitable, but is one needed? It seems to me this system relies on a variance in a high correlation between the two. I checked a gold/silver 21day correlation over the past year. A 0.75 correlation value exists but only in the last 6 months. Prior to that the system may not do so well, due to a lower correlation of about 0.15. See attached. Overall I would say the system on the surface appears to limit risk as well as profit which is a wash. However, there may be a possibility of a higher success rate. This can only be confirmed with backtesting.
I've been pair trading gold and silver for a little while now with some nice results. The hardest thing I faced is coming up with a strategy that seems to put the odds in your favor. Below are the trades I put on today. Entry 7/23 6:10- Offset 7/23 11:59 -CD 9623 +9639 +AD 8878 -8909 Profit $150.00 Entry 7/23 7:15- Offset 7/23 7:22 +GC 1190.2 -GC 1188.9 -SI 1814.0 +SI 1814.0 Loss ($130.00) Entry 7/23 11:27- Offset 7/23 11:59 -GC 1189.3 +GC 1186.5 +SI 1812.5 -SI 1810.0 Profit $180.00 Good Luck!