The CME read my book

September 16, 2016 11:01 AM

In "Nobody Knows Anything", I spend some time discussing the silver/gold ratio and the gold/platinum spread. Given an entry at a favorable time, both trades are low risk and high potential with gold and platinum or silver doing nothing more than regressing to the mean.

On Sept. 15, the CME announced new products coming Oct. 24 including a silver/gold ratio contract and a gold/platinum spread contract. These new contracts will be the lowest cost way to do these trades. As I write, gold has a $286 premium to platinum and it takes 69.3 ounces of silver to buy one ounce of gold. The highest spread between gold and platinum was just after the Brexit vote in late June at $350. The silver/gold ratio hit 84:1 in March. These trades need no brains, only patience.

Chapter Three: Deviation and regression to the mean

Relationships exist between both similar and dissimilar commodities. The ratio of the number of ounces of silver it takes to buy one ounce of gold varied from about 17:1 in January of 1980 to over 100:1 in early 1991. We view both metals as precious and having some aspects of money. But the ratio changes a lot and that creates an opportunity to profit without needing the ability to predict direction of price movement. You don't need to speculate on the commodities going up or down, only that they regress to a mean.

And it's not necessary for commodities to be similar. For some reason, sugar and silver seem to move together much of the time. There is no necessity for a logical relationship in order for there to be an actual relationship.

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