It stands to reason that the lower this ratio is, the less silver an ounce of gold can be traded for (or the more gold silver can be exchanged for). Likewise, the higher this ratio is, the more silver an ounce of gold can be traded for (or the more silver gold can be exchanged for).
It's common knowledge that both metals have been in a bull market since around 2001. For silver specifically, it reached it's lowest point in November 25th, 2001 at $4.00 / oz. A few months later, silver hit a peak at $4.87 on Jan 6, 2002. A few months later, on July 14th silver hit another peak at $5.15.
On an unrelated note, as a Private in the Canadian Forces reserves back then, my daily salary could have bought me just under 16 ounces of silver. 11 years later, as a civilian professional software engineer, my daily salary can buy me about 5 ounces of silver, even though in dollar terms, my salary has roughly tripled. Silver in the same time has increased around 6 times... good thing I was buying mutual funds back the... oh wait... most of them only were up 10% in the same time period silver was up 600%.
Silver's Peaks Coincide with Bottoms in the Gold to Silver Ratio
Back to the point, within a few days of silver hitting those tops in 2001, the gold to silver ratio hit the bottom of a jagged downward spike followed by a rapid consolidation upwards. This pattern has repeated itself several times since. At the bottom of those spikes, the price of silver reaches the point where silver reaches it's peak value compared to gold. After hitting the bottom, the GSR rapidly rises upwards at a fairly astonishing rate.
Looking at the weekly chart overlayed to the silver price dating back 10 years to the start of the silver bull market, there are a few trend lines that serve as very good indicators of when the GSR has bottomed. Back in April 2011, one of these trend lines was screaming to swap some gold for silver, but I was new to investing in silver and wasn't listening. Oh well - that's just how you learn, by making mistakes.
This thus presents a very excellent opportunity to swap silver for gold and wait for a rapid increase in the GSR to swap that same gold back for silver.
Tops in the GSR are not so Easy to Idenfity
On the other hand, the determining when to swap gold back for silver is not as clear cut, as the same chart as above, overlayed with the gold price demonstrates.
In the most recent rally in the GSR, I was tracking an uptrend for support and waited for the GSR to roll over before I swapped gold for silver (which I did in mid January). There was however a level from the 2008 rally in the GSR which should have served as a good indicator that was closer to the top, but I only recently started to pay attention to these charts more closely, and bought some gold too close to that very top. Oh well, it's from your mistakes that you learn best.
I will note that I had picked levels in the GSR dating back to the the 2008 rally at which points I would have swapped more gold for silver. The ratio never hit those levels, but I'm not terribly bummed out by it. I still have my gold, and I still have my silver, but more importantly, I learnt a lot about tracking this chart. That, I think, is more valuable than a handful of ounces of silver more I could have made.
Going forward, I think the approach is sound. Certainly more sound than just buy regardless of the price (which itself is infinitely more sound than not buying anything, when it comes to investing in precious metals).
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