Silver Still Overvalued Relative To Gold

Posted by barkand on May 27, 2011 under Commodities | Be the First to Comment

Silver prices have come down hard – by about 20% – during the past month. So is silver cheap here?

The short answer: No.

Silver would need to fall by another one-third from today’s levels to reach the long-term ratio of silver to gold. Of course, another way to accomplish this would be a massive run-up in gold prices relative to silver. But our guess is silver will do most of the work in this relationship.

The chart below shows us the ratio of silver prices to gold prices. When the ratio is going up, silver is becoming more expensive (valuable?) compared to gold. As we see, the ratio was somewhat stable until last autumn. Then the silver mania kicked into gear and sent the price up to near $50 per ounce.

There are two more items of interest here. First, the silver-gold ratio is now sitting right at its 20-day moving average, which is currently acting as some weak resistance. And we didn’t show it on the chart , but the move from the recent low in the ratio to this week’s top was exactly a 38.2% Fibonacci retracement.