Monday, January 25, 2010

Silver Wheaton / iShares Silver ratio (SLW:SLV)

I keep an eye on this thinking it is some sentiment or momentum indicator. it helps to gauge how much investors are willing to pay up today (in silver) for the right to sell silver at market in the future. The function of the ratio is kind of analogous to the fluctuating market price of a bond. The bond has a fixed coupon rate that it pays, but the price of the bond fluctuates on the open market. So buying SLW (relative to SLV) at an extremely low price is like buying a bond with a coupon rate of, say, 5% at a, say, 30% discount to par, so if you pay 70 instead of 100 for a bond your future effective yield on the instrument is much higher than the original 5% (how much higher depends on the security's maturity).

Except that SLW is an ongoing concern, with no set duration, as far as I can tell, so comparing SLW:SLV to a preferred stock might be better. Oh except that SLW isn't actually paying owners a regular distibution, so you might compare this to a zero-coupon bond. a zero-coupon preferred share of stock?* Alright, alright, this whole analogy is breaking down pretty quickly. Snip.

Anyhow, what caught my eye about the ratio was the huge divergence between the trend of the ratio itself and the CMF indicator included on the bottom panel. Thing is, I am not sure how meaningful that indicator is on a ratio. Probably just better to view it as a curiosity than a trading signal.

* Zero-coupon preferred stock! I kill me sometimes. And yes, I'm easily amused.