Just 5 short years ago, gold was at $660/ounce and seemed expensive. The past couple of months have seen gold prices over $1900/ounce and relatively speaking gold seems cheap. Silver seems even more reasonably priced at $30/ounce. The historic ratio was 20:1 with a double eagle worth 20 silver dollars. The last decade was had the ratio about 35:1. Today the ratio is 54:1 which means if one were so inclined they could exchange 1 ounce of gold for over 3 pound of silver. That seems ridiculous to me. I believe that ratio will fall closer to the historic average with gold priced around $1500/ounce and silver around $40/ounce.
Futures trading allows for 100 ounce contracts for gold with the $9450 margin to open and $7000 margin to maintain. For example, gold opened today at $1740/ounce. A contract is worth $174,000. If a contract were opened this morning at $9450, a margin call would have been received at soon as gold dropped $24/ounce. As gold plunged through this number, some folks got screwed and there contract was worth $164,000 at the end of the day and they were forced to liquidate and lose their original margin and another $500.
Silver Futures contracts are for 5,000 ounces. One could open a contract this morning for $21,600 and control $182,500 worth of silver. As silver plunged to $30/ounce this contract was worth $150,255 again wiping out the opening margin requirement and having the contract holder on the hook for another $8000. Ouch.
I still believe precious metals and other commodities have a place in a diversified portfolio along with equities, bonds and currencies. I am not married to a particular ratio, nor do I feel compelled to rebalance frequently.
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