Diary of a Financier

Going to School on GLD/SLV

In Capital Markets on Tue 9 Aug 2011 at 10:47

I’ve made some great trades to protect this house over the past two weeks.  I want to dwell on a not-so-great trade.  I need to go to school on this and never repeat the mistakes I made in buying the Silver ETF (SLV) last week.

I’m down about 5% in my SLV position.  I bought SLV because it was lagging Gold (GLD) severely, and I thought GLD was grinding up in overbought territory.  (I already had an open GLD long, but I hadn’t been able to build a big enough stake before the price rallied parabolically.)  In an attempt to talk myself out of a Silver position, I put together the following charts before I pulled the trigger; the charts overlay Gold v. Silver, including their ratio:

GC v SI (daily)

GC v SI (monthly)

I acknowledged that the Gold/Silver ratio was at modern lows, as indicated by the red “Ratio” curve above.  That’s a very quantitative measure, and if the past two years have taught us anything, it’s that quantitative rationale is a guide, not a prophet.  So, I balked at the historical context and bought SLV anyway.

The lesson is not that I should have piled into Gold.  Rather, the lesson is that I should not have added Silver (because I found a legitimate risk).  I was not under pressure to buy, in fact I could have sat in cash instead.

–Romeo

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  1. Unlike your contemporaries, your blog is credible!!

    u

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