Gold Silver exchange

Abstract

Buying and gold or silver when it is weak compared to the US dollar and then selling when it is high is a straightforward plan but comes at a high cost. Each time you trade back your metal into dollars you incur a capital gains tax. The government wants its share of your wise investment. Further, in this day and age even if you decided to deal in cash, anything over $10,000 triggers a notification to the IRS and practically anything over $5,000 will make the bank sit up and take notice. You could keep your dollars under your mattress, but there is safely depreciates in value as the dollar loses a reliable 3% of its buying power year after year. Just to break even you need to have it earning 4% or better; 4% just to stay in the same place, while waiting to change those dollars back into metal… sometime.
Now gold and silver have a ratio of exchange. There are books and books on this topic and all sorts of historical ratios out there like 12:1 in Roman times and 15:1 at the onset of the United States. More recently in the last 50 years, the ratio has been as low as 15:1(during the 1960s) 20:1 in 1979 and 30:1 in 2011. It’s been as high as 90:1 in 1990 and again 2019. The “modern” average is somewhere around 60:1.

Looking at the last 20 years or so the ratio has generally dropped no lower than 40:1 (but for a short stint in 2011).
Rather than looking at the prices of either metal in terms of US dollars one could choose to simply watch the ratio between the 2 metals. When gold is worth a LOT of silver (like in 2019, 90:1), one could exchange their gold for a large volume of silver. When the ratio reverses, and say, gold is only worth 40 ounces of silver, that same silver would convert back into gold; much more gold than was started.
What’s intriguing about this method is that the dollar value of either metal is irrelevant. Gold could become worth $100 US per oz and silver could become $10 per oz. That would be a REALLY good time to turn gold into silver because that 10:1 ratio is absurdly high in silvers favor. If 2 years later gold was $30 US per oz silver was $0.30, that would be a great time to turn that silver back into gold; 10x the amount of gold started with originally. Sure the value of gold and silver went down but the number of ounces after the trades has greatly multiplied.

There is no income report, nothing to declare to the IRS. You are simply making a commodities exchange, trading apples for oranges and back to apples again. If however, you try and turn the gold or silver into US dollars, you would have to deal with that issue.

There are some real-world nuances that makes add a bit of extra work to this. Since you will almost certainly be using a business to make this transaction, there are brokerage fees going back and forth that must be considered. These could be as high as 10-15% of the cost going from one metal to another meaning that it’s probably wise to wait for large swings rather than small changes. This likely means waiting years between conversions.

Please read this PDF for more info.