Silver-Gold Ratio Still Favors Gold

Posted by barkand on August 10, 2011 under Commodities, Relative strength | Be the First to Comment

When the price of silver reached its orgasmic peak at $48.70 at the end of April, it required only31.5 ounces of silver to buy one ounce of gold. Based on current prices, you would now need 45 ounces of silver to pay for an ounce of gold.

The chart below plots the ratio of silver to gold. When the line is rising, it means silver is performing better; a falling line means gold is outperforming silver. Notice how the ratio has politely confined itself within its Bollinger bands since the Financial Crisis of 2008. At various times it has either hugged one of the bands for a period of months or has used the bands as a reversal point. Even the 20-week moving average has functioned well as a support or resistance point. With the 20-week average turning down and the lower band currently falling, we expect the ratio to at least go and kiss the lower band or even slide along it for some time.

Head-and-shoulders fans might even observe that the ratio recently broke a neckline formed by the lows in January and June.

When silver started its run last autumn, the ratio of gold to silver was roughly 62-to-1 and we feel it is possible that we will return to that ratio. It does not mean gold has to increase in value (which it has) or that silver must fall (which it has). It does mean that gold is the better horse to have in this race and a strategy of being long gold and short silver is preferred.