The three-hand reel is not a dance that should be attempted by anyone unsure on their feet. Dancing in pairs is tricky enough – when you have a trio strutting their stuff, matters can become complicated.
So, spare a thought for those trying to navigate the three-way relationship linking gold to silver and then both to the dollar. Here, truly, is a fascinating, sometimes baffling and occasionally infuriating piece of financial choreography.
Should you be planning to trade among these three assets, you will need a firm grasp of the relevant dance steps and a reliable diagram on which to practice.
Competitors and allies
The first factor to bear in mind is that looking simply at current prices will tell you very little. Gold was $1,286.75 a Troy ounce yesterday and is a little lower, at $1,283.75, today, while silver was $15.03 an ounce yesterday and edged up just three cents to $15.06 today.
The dollar traded at €0.8852 yesterday and is down slightly at €0.8838 today.
From this, can we conclude that gold’s value is pretty well fixed at about 85 times that of silver? Well, no – as we shall see, the ratio swings round quite markedly over time.
Perhaps the starting point is to understand the paradox that these three assets are, at one and the same time, competitors and allies.
This contrasts with the value of equities, which no one needs to translate. For instance, take the share price of Mitsubishi Corporation out of yen and put it into dollars to find out what the company is worth.
At the same time, gold (although not silver) partners the dollar in terms of acting as a reserve asset. Traditionally, central bank vaults were said to hold the “gold and dollar reserves”, a shorthand phrase still in use, despite the importance of currencies such as the euro.
But while bullion and the dollar are in partnership as official assets, they are rivals in the world outside. As is well known, both vie for traders’ and investors’ attention as a haven in times of trouble.
Plotting relative prices during the past year tells the story. On 16 April 2018, the dollar was down at €0.8078, while gold stood at $1,344.40 an ounce.
By 16 April this year, the dollar had risen to €0.8852 an ounce while gold had dropped to $1,286.75.
A 9.6% dollar appreciation was mirrored in part by a 4.2% fall in the price of gold.
Silver in demand for industry
Have we forgotten about silver? Not at all. Over the same period, it declined from $16.68 an ounce to $15.03, a 9.8% fall.
But while, broadly speaking, silver and gold prices move in the same direction, the relationship between them is anything but stable. In April 2011, for example, gold was just over 30 times more valuable than silver, against the current multiple of 86 times.
The second is that silver is used far more extensively as an industrial commodity than is gold, accounting for more than half of silver demand against gold’s 10%-15% demand. This makes silver sensitive to economic activity in a way that gold is not.
Until 1974, when a ban on American citizens owning gold was lifted, silver was the only domestic outlet for bullion speculation, prompting further instability. For those undertaking the three-hand reel, that is one complication fewer to worry about.