I was considering this spread sell gold futures and buy equal amount of silver. As shorting gold is a little scary for the long term this spread may be a good substitute. In order to hedge your short GLD position, you would have to buy 5.5555 SLV to achieve a hedged position. We calculate this by dividing 1 by the hedge ratio (.18), which gives us 5.555. What this means is that if SLV moves 18 cents for every dollar that the GLD moves, then if you bought 5.55 of the SLV, against one GLD, the $1 loss in gold would be cancelled out by the $1 gain (.18 x 5.55) in your long SLV position. You can also do this with the futures (of course the ratio would be different ie. London or US exchange?)
Where did you get your hedge ratio of .18 from (not saying it's wrong, just wondering how you got it). What is the reasoning behind buying and selling equal amounts to try and cancel out gains?
The ratio was figured out for the ETF (I did a little research) I personally prefer the futures! The ratio is quite different but you have the beauty of LEVERAGE! It does not have to be equal to the cent . You gain from the spread narrowing ie. silver getting the better of gold. This trend is there (see the chart) and I suspect it will remain. The raughly equal amount is a protection/cushion from severe price moves in either metals.
In trading you do not "know" anything but you can look at the past(trend) and make an educated guess/bet. Silver is stronger and gold is weaker - it seems. Look at today's future's. After this you make you own decision based on what you think is profitable.
Silver is an industrial metal, gold is not. If one is bullish the economy or stocks or really technology, the long SLV/GLD ratio makes sense. Also higher interest rates (lower bond prices) should keep a strong bid under this spread.
We like to look at the VERY long-term charts, like a weekly. Stepping back gives a better view of the sustainable moves. Attached is the spread going back 30 years. In bull moves for precious metals, silver tends to outperform. In precious metals bear markets, gold tends to outperform. You can see the shift begins in the early 1990s. These spreads won't help you trade gold or silver for short-term moves, but if you are looking for a longer term position, spreads can be very helpful.