A Fresh Look at the Gold / Silver Ratio

Includes: GLD, SLV
by: The Silver Analyst

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.

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