If you noticed the price of gold and silver had been steadily sliding since late 2012, you aren’t alone. Several years ago, gold was $1,800 per ounce and silver $50 per ounce. Now gold is down to $1,000 per ounce and silver down to the low teens largely due to the economic recovery after the Great Recession.

Due to these recent developments, the tastytrade research team team decided to take a closer look at gold and silver prices and the relationship between the two in a recent Options Jive.

As you can see from the chart shown below, gold (like many commodities) had recently been on multi-year lows:

Heavy_Metals_Options Jive

In the past, precious metal prices often spiked when equity markets were under pressure because people feel “safer” holding a physical commodity as opposed to “paper” stock certificates. Given the breadth and severity of the Great Recession, it’s no great surprise then when gold and silver spiked substantially through this extremely turbulent period. Gold and silver have dropped as the market got stronger.

At least that was the case until the onset of 2016. Currently, equity markets are in the middle of an epically bad start to the trading year. By some measures, it’s been the worst start to a trading year in history. So, it’s no surprise that gold and silver prices have come out of hibernation and started to rise again.

And where there’s price movement there’s often opportunity.

The recent episode of Options Jive introduces how traders interested in gold and silver can trade them through futures and ETFs, as well as a strategy that leverages the historical relationship between the price of gold and silver.

Generally speaking, futures products require traders to take substantial positions in the underlying commodity. In gold, one futures contract is the equivalent of 100 troy ounces. For silver, one contract is 5,000 troy ounces. In contrast, the gold and silver ETFs (GLD and SLV, respectively) are much less capital intensive. In GLD, buying 100 shares would get you roughly one ounce of gold exposure, with a capital requirement of about $10,500 (depending on the price that day). An investment in the SLV is even more reasonably priced with 100 shares equating to about 1 troy ounce of silver for a total investment of $1,350 (again, depending on the price that day).

Going a step further, the correlation between gold and silver has recently been .78 when looking at 3-months of data. The fact that gold and silver have been virtually attached at the hip through their history also provides another potential method of trading the two against each other.

One of the most watched ratios in the precious metals space is the Gold/Silver Ratio - which is the amount of silver it takes to buy one ounce of gold. This ratio is calculated by dividing the current price/ounce of gold by the current price/ounce of silver. Using the numbers from the January 8, 2016 Options Jive, the current Gold/Silver ratio is 1094/14, or roughly 78. That’s pretty high.

As opposed to taking an outright long or short position on gold/silver, a trader looking to get active in this space could also deploy a trade seeking to leverage the current Gold/Silver ratio.

Traders expecting the Gold/Silver ratio to revert to the mean might then sell gold and buy silver. On the other hand, traders expecting the ratio to further expand might buy gold and sell silver.

If you'd like to learn more about the gold and silver trade, we recommend you watch the entire episode of Options Jive focusing on this topic, or explore the tastytrade archives for other relevant content, including Splash into Futures with Pete Mulmat.

If you have any questions or feedback on this or any other topic we hope you'll follow up at support@tastytrade.com.

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.