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Thursday, November 15th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

What’s Next for the Gold/Silver Ratio?

By Brad Zigler

History repeats itself. Somebody important1 said so.

Many silver traders and investors regard the gold/silver ratio now and think that old maxim is being proved again.

The white metal’s been, er, white hot recently. Silver’s has become expensive – not just in dollars, but in terms of gold. And as silver’s price has raced higher, the gold/silver ratio has plummeted.

The ratio, which describes silver’s buying power by dividing the per-ounce price of gold by that of silver, has averaged 60:1 over the past 35 years, meaning it’s taken 60 ounces of silver to purchase one ounce of gold. Though with silver’s most recent push to the $36/oz level, it now takes much less.

The gold/silver ratio broke below 40x this week, sending silver bulls into a tizzy. A decline in the gold/silver ratio is seen as bullish for metals, a notion borne out by the last four decades of price action. Since 1977, there’s been a negative correlation of 83% between the ratio and silver’s price.

Many investors now wonder if gold’s multiple is headed back down to its historic (200-plus-year) equilibrium of 16x.

Click to enlarge

Gold/Silver Multiple

Gold/Silver Multiple

To that, I say, “Let’s not get ahead of ourselves.”

The last time the ratio dipped below 40x, it was a short-lived excursion. That was back in February 1998, when the ratio spent only two trading days under 40:1 before regaining its footing for a climb back to 60:1.

So is the gold/silver ratio due for a similar bounce now?

It’s often said that prices don’t rise or fall in straight lines, but if you look at the recent trajectory of the gold/silver ratio, it’s been pretty straight – straight down. The plummet was a breakout move, an uncoiling of a spring that had been building for a year.

Click to enlarge

Gold/Silver Multiple: A Close-Up

Gold/Silver Multiple: A Close-Up

Back in September, we measured 50:1 as an intermediate target for the breakout (“Where’s The Gold/Silver Ratio Headed?“). The ratio reached that level in November and finally pierced it in December. A rebound in the ratio retested 50x as the new resistance, setting up the current swoon.

If we look at the 50x retest as a yardstick, then the next objective ought to be 37x.

“Not too optimistic,” I hear you say. Well, no, not for a straight-line decline. Trails like that ultimately lead to consolidations. And possible rebounds.

I’m only considering the market’s current momentum here. Keep in mind, too, that 37x is an interim target, not the endpoint.

The gold/silver ratio is a function of the metals’ price action; it is driven by the metals’ prices, not the other way around. Each metal has its own fundamental and technical influences. The gold/silver ratio merely reflects their confluence.

Based upon silver’s outperformance, fueled by investment and industrial demand, there’s still room for some downside for the ratio. But a correction in the short-to-intermediate term ought to be expected. Amid the turmoil swirling in North Africa and the Middle East, safe-haven demand for gold could outstrip silver’s industrial-driven demand.

Add the oil overlay, and the potential for consolidation and/or short-term reversal increases. Higher oil prices over a sustained period can put a crimp in our nascent recovery, slowing industrial demand for silver.

In short, the multiple could expand rather quickly, should the heat in North Africa crank up enough to put the kibosh on economic expansion.

And what of those hopes for a return – a sustainable return – to the historic 16:1 level? They shouldn’t be dashed, but they should be tempered.

The last visit to that level was very brief; it lasted just one week over the 1980 New Year’s holiday. Traders and investors alike will need to be nimble and watch for signs of topping when, and if, the gold multiple dips that low.

For now, though, keep your eye on the 37x level. We’ll take a fresh look at the ratio when it gets there.

Endnote

  1. The quote is often attributed to George Santayana, although he actually said, “Those who cannot remember the past are condemned to repeat it.”

The original article is published at http://seekingalpha.com


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