A Fresh Look at the Gold / Silver Ratio

How has the Gold Silver Ratio (GSR) been doing recently and how does this stand up against the price action of gold and silver over the past years?

I don’t personally use this ratio to trade in and out of silver. Some people swear by it as a useful tool to swap between silver and gold when one becomes undervalued relative to the other. Where I come from in Britain, with the high sales tax and spreads on silver such a pursuit is not very profitable, but I know it is for others.

Where I do personally find it useful is for bigger trends in gold and silver. At one extreme, when the GSR hits 15 at the climax of a multi-decade silver bull market (as in 1964-1980), it is time to seriously think about selling. At the other extreme, when silver is suffering in a deflationary bust, it is time to buy - such as 1993 when the GSR hit 100 (only the second time in 200 years that such an event occurred). At a current value of 73 things may seem oversold for silver in GSR terms and one would have a justification for that looking at the 14-year chart below (silver price in red).

Note how the GSR recently hit a spike high of 86 as silver sold off in extremis and then began a drop downwards. Also notice that there is a line of resistance going back to just before the Buffett silver price spike, where the GSR hit 78, and again in 2003 at 80, prior to the beginning of the silver bull. So it appears that the low 80s may be as bad as it gets for silver during this prolonged bear market correction. Note also that the Buffett spike was as good as the GSR got for silver these past 14 years, even better than any recent price jumps. It got to 41 but it has not dropped below 45 during this bull market.

Comments

[Conan the Barbarian]

Very interesting depiction. My only question would be is how often do gold and silver diverge from each other in terms of direction.

What I mean to say is that if both drop by the same percentage amounts from present levels, wouldn't a high GSR be maintained and still indicate a Bullish stance even though you would be losing money?

2009 Feb 02 03:53 PM

[The Silver Analyst]

Gold and silver do not diverge much at all except in rare cases such as when Warren Buffett bought a mountain of silver but no gold.

Clearly, the GSR can move in silver's favour but silver drops in price which means that silver is outperforming gold on a downturn which is not likely since silver tends to move down faster than gold (as we have seen multiple times).

So, typically a dropping GSR (bullish for silver) is more likely when silver is rising in price faster than gold.

2009 Feb 03 09:56 AM

[Conan the Barbarian]

Silver: thanks, makes sense.

I think, I would go the Silver route for the future recovery then, The confluence of both worlds, inflation and industrial growth.

2009 Feb 03 11:56 AM

[doubleguns]

What it the longest period of time that the GSR has been above 70 and when? Seems when it gets above 70 for any period of time it really takes of afterwards. Chart does not go back very far.

Anyone know?

2009 Feb 03 03:58 PM

[heartbone]

doubleguns take a gander at this chart
www.gold-speculator.co...

It looks like a couple of extended periods of about the same length,
over10 years.

In 1939 all time high was set @ 139 to 1

2009 Feb 11 10:29 AM

[heartbone]

static.seekingalpha.co...

On this chart with better resolution
it looks like during the 1986-1997 period it mostly but not always stayed above 70.

Today's S/G of 69 is crazy high based on the physical realities.

I would not be surprised to see silver value >= gold value one day.

2009 Feb 11 11:08 AM