I have a silver coin. Sell me a barrel of oil

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/finance/commodities-futures/an-ounce-of-silver-is-now-worth-more-than-a-barrel-of-oil-196e149e?mod=hp_lead_pos5

An Ounce of Silver Is Now Worth More Than a Barrel of Oil

Neither investors nor industrial buyers can get enough of the precious metal, while a glut of crude has depressed fuel prices

By Ryan Dezember, The Wall Street Journal, Dec. 27, 2025

In a year in which precious metals shined, silver stole the show.

Silver’s price blew through a 45-year-old record and has more than doubled in 2025. At $76.486, a troy ounce of silver is worth more than a barrel of oil in futures markets, where U.S. crude ended Friday at $56.74.

Aside from two brief stretches in the chaos of 2020’s Covid crash, that hasn’t happened since West Texas Intermediate oil futures began trading in 1983. Neither investors nor industry can get enough of the precious metal, while a glut of oil has swamped energy markets and depressed fuel prices.

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Silver is also in demand from jewelers, medical-device makers, electric-vehicle manufacturers, data-center developers and especially solar-panel factories. The solar industry has been consuming nearly 30% of annual production from mining and recycling…

Either U.S. drillers, who have been pumping a record of about 13.5 million barrels a day this year, or the Organization of the Petroleum Exporting Countries, which has also been boosting output, will have to pull back or risk worsening the glut. That is especially true, according to analysts, if Russia-Ukraine peace talks or a resolution to the U.S. standoff with Venezuela loosens restrictions on oil exports… [end quote]

Over the years, when long-held ratios suddenly reverse it turns out to be temporary in the long run. When the yield of TIPS suddenly rose above the yield of Treasuries for the first time in October 2008 I bought TIPS. When oil went into contango in March 2020 (the Covid shock) I bought XOM.

Wendy

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It’s called a “pair trade”, when you think the ratio of two things goes out of whack, you can capitalize on it by shorting the overpriced (in your view) thing, and using the money received to buy the underpriced (in your view) thing. In this case, you should short silver and use the money to buy oily things (like XOM, for example).

Similarly back in 2008, someone could have shorted treasuries and bought TIPS.

It isn’t always easy to do so because not everything is easily shortable, or reasonably inexpensive to short.

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In fact, in October 2008 I backed up the truck and bought TIPS when the TIPS yield was higher than the Treasury yield for the first time ever. That was a good move and the only mistake I made was buying 10 year TIPS instead of 30 year TIPS.

I would have shorted the stock of MBIA if I had known how to short because it was obvious that a gigantic wave of bond failures was imminent.
https://finance.yahoo.com/quote/MBI/

I just didn’t know how to do a short and anyways shorts can be risky.

I wouldn’t short silver now because the price will probably rise. (See today’s Control Panel.) I’m just amazed because the change in relative price has been so fast and extreme.
Wendy

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And you have to decide which way it is going to change. Is oil going to get more expensive or is silver going to get cheaper?

DB2

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Nope. That’s the entire point of a pair trade! You don’t care which one moves, you just care that the ratio comes back to what you think is “normal”.

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Is that true? There are two ways to restore a ratio. If the ‘normal’ ratio is, say 1:1, then the ‘overpriced’ one could drop in price to restore the ratio. Or the ‘underpriced’ one could rise to restore the ratio.

One doesn’t short both sides, do they? If you short the wrong one then you are SOL.

DB2

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You buy the one that you think is underpriced and short the one you think is overpriced.

When I saw that an ounce of silver can buy a barrel of oil it would appear that silver is overpriced (and maybe oil is underpriced) by historical standards. So, as @MarkR said, I should short silver and buy oil (or maybe XOM).

That may be why banks shorted silver. However, the whole supply/demand picture for silver has changed and there’s a good reason the price of silver rose and may not decline. (See today’s Control Panel.) But the conventional trader would short silver. That may be why the Fed has to bail out a bank.
Wendy

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Summarizing a key part of this conversation:

Silver is now becoming a significant industrial metal and that radically changes its possible future from “decorative” and “store of value” into something else entirely.

Glad I held onto (quite literally) the family silver.