Ratio of Gold to Silver

The first two charts below are our trading range charts for gold and silver. The green shading represents two standard deviations above and below the commodity's 50-day moving average. When the price moves to the top or above the trading range, the commodity is considered overbought (and oversold for moves below). As shown, both gold and silver are currently trading right right at overbought territory based on their historical trading patterns.

However, gold has been significantly outperforming silver since the middle of 2008. In the third chart, we highlight the ratio of gold to silver (gold divided by silver). A declining line means silver is outperforming gold, while a rising line means gold is outperforming. Since June 2008, the line has pretty much gone straight up, as almost all commodities except for gold have seen big declines due to deleveraging, the bursting of the speculative commodity bubble, and the global economic downturn. Based on the ratio of gold to silver over the last ten years, a reversion of the mean trade would be to go long silver and short gold.

click to enlarge

Comments

[cuvo:]

For 500 years up the the mid-1800's, the Gold:Silver ratio was fairly stable at about 18:1.

Jan 05 11:05 AM

[1977°C:]

Nice picture, there is nothing safer than going short Gold now instead of Silver as in the biggest Wall Street to Jakarta crash the luxury assets will be punished more than cheaper assets.If one can not afford Gold jewelry they still can buy silver.
SELL GOLD NOW.

Jan 05 11:43 AM

[chinesezodi...:]

Hard to argue with this as a nice opportunity to hedge, esp if you are long gold already.....

Jan 05 11:46 AM

[dawase@gmai...:]

As I've mentioned in other places, I recently sold 1/2 my position in GLD and added 1/4 in USO and 1/4 in SLV. This block of commodities makes up about 10% of my portfolio with about 35% in bonds, 40% in cash and 15% in equities

While I agree with the thesis here, I think short GLD in the current geopolitical/currency environment is a dangerous play. As the rest of the world races to the bottom of the yield stack, Gold will look better and better on a relative basis.

ie, the ECB will likely cut rates more to stimulate some inflation, where do you put your money if you live in the EU? The Dollar? The Yen? Look at the Yen... The Japanese are fighting to devalue it. I would expect this kind of action to play out around the world thanks to Bernanke's ZIRP. Leaves one with few options. Eurobonds? Still denominated in Euros.

Jan 06 12:44 AM

[silverwink:]

Fact !!!


On Jan 05 11:05 AM cuvo wrote:

> For 500 years up the the mid-1800's, the Gold:Silver ratio was fairly
> stable at about 18:1.

Jan 06 08:34 AM

[Deegan:]

Where one parks or invests one's money depends on your outlook for the future. I think we are in a bear market and until the housing market turns around we will remain in one.

There is no sense to park your money in treasuries as they aren't paying anything. It makes more sense to park your money in gold, the real bullion if you can find it. Even if the stock market goes down and the value of the dollar falls you will have a hard asset. Silver could easily double or even triple if gold goes over $1000.

Jan 06 09:55 AM

[Kaleb22:]

I agree that silver is bound to double if not triple this year. Look at this summer when Gold was flirting with $1,000 and silver was around $20. Now we have $880 gold and silver is only at $10 and $11, silver looks promising.

Jan 06 02:49 PM

[User 30121:]

Will it matter on December 21, 2012?

Jan 06 05:30 PM

[SwingTimer:]

This ratio analysis between gold and silver is all well and good, and perhaps even useful. But unless you can predict one component (either one) with some degree of certainly -and by some relevant fundamental/technical evaluation proceedure which takes into account prospective conditions - the ratio's status is quite meaningless. Just my humble opinion.

The same can be said about standard deviations as a useful measure of propensity for reversion to the mean. But, again, such a measure (while a quite useful evaluative tool) does not CAUSE nor necessarily MANDATE a particular change in the value of the underlying under analysis. It merely DESCRIBES what HAS happened - not what WILL happen.

So, to the extent that historical circumstances can be useful in describing the "nature" of a particular "item", any measure of historical circumstances is most relevant, and useful - but should be considered insufficient as the basis on which to make an investment decision....in my humble opinion.

In the current environment of demand destruction for commodities generally ( and silver in particular), the single most relevant factor is the fact of supply destruction arising from the well-known price erosion and curtailment in the availability of financing.

By contrast to silver, which has a basis for its price given its demand for industrial purposes, gold's utilitarian value is minimal and is largely ornamental. In my opinion, the largest prospective merit in buying gold is the assessment that SOMEONE ELSE makes regarding whether gold may or may not be worth more than its current price - not an sound basis for valuing an asset!

....in my humble opinion, so draw your own conclusions.

Jan 06 05:59 PM

[12345:]

How do you value a Federal Reserve Note? It's a piece of paper that others are willing to exchange goods for. Gold was money before Governments existed, FRN's are printed whenever the gov't feels like it, gold is not.

I fail to see hopw FRN's carry more true value then a Precious Metal



On Jan 06 05:59 PM User 179191 wrote:
the largest prospective
> merit in buying gold is the assessment that SOMEONE ELSE makes regarding
> whether gold may or may not be worth more than its current price
> - not an sound basis for valuing an asset!
>
> ....in my humble opinion, so draw your own conclusions.

Jan 06 07:00 PM

[know nothing:]

Production costs, Existing supply, Current economic enviroment, (and I don't mean the january ephoria that we experience every year in the stock market this to shall pass) Goverment manipulation, Demand, The number of countrys adding to the monetary supply by the billions, = Bullish metals... Could we really see prices fall to the 1999 and 2000 levels in this economy? Then short metals, I'd rather bet on the horses,or grey hounds! Could we retest the 2008 lows? sure! What a great buying oppurtunity that would be. Oh, how much more will the democrats spend this year? That depends on how many floods, hurricanes, forest fires, tornados, earth quakes and other countrys wars we have to finance. Not to mention the new gas taxes that are comming. Lets watch Iseral, Iran, Pakistan, India, and the oil producing countrys. It can't get any scarier, Can it? Well sure it can ,lets through in another terrorest attack on U.S. soil just to test the new Black president and his staff! Good luck selling your gold! :)

Jan 06 10:05 PM

[ArkiTek:]

70% of gold's direction has to do with the dollar's direction. This means that much of our task is figuring the dollar strength comparative to other currencies. If the dollar continues its downward push, then gold will rise.
Looking at my dollar chart, it looks like the dollar is regaining its upward direction which means that gold is headed down. Surely, there are many of us that are nervous about the future and that may cause gold to resist the downward pressure but if the dollar continues up then gold must succomb to the lower prices.
My guess... the Obama honeymoon is going to last until the first part of April, then the dollar will fail, the stock market will head for new lows and THEN BUY GOLD!

Jan 06 10:19 PM