Gold / Silver Ratio at Code Yellow

click to enlarge

There is a technical case to be made that the stock market has significantly higher to go before it poops out. It would have been healthier to get a 'B' style decline into a 'C' rise, but such is life. The market has the potential to go out in a blaze of ultimately ill-fated glory. But the rally will not have the endurance it would have had if there was a proper correction by this time, in my opinion. At this point it does not seem to be in the cards.

Regardless, all this speculating about the nature of the rally will be moot if the GSR (see chart) does something other than just creep higher, as it has been doing. Big, sovereign elephants creeping into t-bills? GSR grinding higher? No, regardless of short term bullish potential I do not like the stock market's risk/reward ratio at this point. Nuh uh.

Nor am I overly thrilled with the gold stocks in the short term even as I hold 'em firm, and with this ratio still looking like it has a better than even chance to continue rising I don't like the risk/reward in silver stocks and thus, as a note to NFTRH subscribers, I sold the lone silver producer in NFTRH's speculative portfolio Friday for a chicken feed profit. Cash level in that portfolio is at 42% and looking to add more gold stocks. Patience. Will they decline to the current no brainer target or is that a little bull flag that will lead to bigger and better things near term? No matter because I am bullish for more than a play, the gold miners are counter cyclical and as was shown in NFTRH26, available here as a sample, there are long stretches when the HUI can and will follow the GSR on the counter cycle.

In short, the miners will do relatively lousy if this is a real recovery. It however, isn't. It can't be. It is born of the cold reality of post-crash sentiment and a whole lot of bad policy that already killed us once. Watch the GSR and watch those events in treasury land (and for god's sake, when Larry Summers comes on the idiot box, change the channel) with short rates declining and long rates increasing. That as they say, ain't good.

Comments

[Alan Young:]

Maybe you should explain what the GSR has to do with stock prices?

May 04 04:41 AM

[Gary Tanashian:]

From my point of view, the GSR is most important as a macro indicator. In short, when gold is rising relative to silver, this implies a reduction of liquidity and growing risk aversion. Combine the gold-silver ratio with declining t-bill rates and you have more evidence. Then, take it further and see money supply measures like the M2 and MZM hiccuping and it is time for caution. HOWEVER, today is seeing the GSR get hammered and my potential low target for a retrace in the ratio is 62-64. Code yellow would then be full red at that point as far as risk/reward goes on the stock market. The implications for gold stocks are more complex and will be looked at going forward.

May 04 11:51 AM

[tallguy:]

Interesting article.

There is another refinement that may be underway, and that is the default to one standard, gold rather than silver as the default currency in preparation for the inflation that is to come.

Gold is easier to store, weighs much less / $, takes up less space, more universally has been a currency, doesn't tarnish, is easier to ship, etc.

Silver may be relegated to the commodities pile, with gold in the currency pile. China for example is classifying gold as a monetary asset.

May 04 05:01 PM

[capt Brian:]

Let me try... Gold is a safe haven, when stocks and economic stuff is doing good, sell gold buy stocks. Economy good, we need some silver, so silver gets a boost (somewhat) and as the Gold Silver Ratio [GSR] narrows, it does so because silver is being used now a little more in industry, {as will gold, but not as much percentagewise} so gold softens, and silver does too but not as much as gold, so as the GSR narrows, it could portend some increasing economic activity.

Now, that may be only speculation driving up silver and gold down during a time of stocks rising.

BUT, this time there is a monkey wrench in the machinery... It is the simple factor of HOW our 'recovery' happened'.

It did NOT recover because folks felt better, were making more money, had more money to invest, and took whatever cash they had left and prayed for a recovery in stocks they stayed in during this horrific sell off.

I doubt seriously there is new money coming into the stocks from the general public, methinks they are shaking in their collective boots.

The money is coming from sidelined money that exited huge investments by mutual funds, etc who HAVE to make a profit to pay the promised returns. Annuities etc.

Look at the headline this morning in the front page of the Palm Beach Post. Saying how many have to accept lower wages. some places are not laying off, just saying, "Why doncha come in only one day a week til things improve?"

So now we begin wage deflation. And where is the money going to come from to continue to buy ALL the non-essential goods we have been buying our kids for decades?

That should be enough for you to chew on. I hope that helps..

PS if that is what u r haning your hat on to make an investment. STOP make another plan!


On May 04 04:41 AM Alan Young wrote:

> Maybe you should explain what the GSR has to do with stock prices?

May 04 07:30 PM

[capt Brian:]

RE the article, I think it does not help us out here.

May 04 07:33 PM

[cottontop:]

Im' a poor boy, just trying to make a buck. Inflation is coming! quick! I believe silver mining ( the right ones ) and refineries ( again, the right ones) are the future million dollar babies. My question: How do I buy, with my own money, the stock certificates, in my own name? I do not mind paying a broker, but I do not wish him to own me. Raymond Sirmans Tifton, Ga.
raymondsirmans@hotmail...
I have never ownrd one share of any stock, nor mutual fund. If I want to survive the coming storm, I think some thought change is necessary.


On May 04 07:30 PM capt Brian wrote:

> Let me try... Gold is a safe haven, when stocks and economic stuff
> is doing good, sell gold buy stocks. Economy good, we need some silver,
> so silver gets a boost (somewhat) and as the Gold Silver Ratio [GSR]
> narrows, it does so because silver is being used now a little more
> in industry, {as will gold, but not as much percentagewise} so gold
> softens, and silver does too but not as much as gold, so as the GSR
> narrows, it could portend some increasing economic activity.
>
> Now, that may be only speculation driving up silver and gold down
> during a time of stocks rising.
>
> BUT, this time there is a monkey wrench in the machinery... It is
> the simple factor of HOW our 'recovery' happened'.
>
> It did NOT recover because folks felt better, were making more money,
> had more money to invest, and took whatever cash they had left and
> prayed for a recovery in stocks they stayed in during this horrific
> sell off.
>
> I doubt seriously there is new money coming into the stocks from
> the general public, methinks they are shaking in their collective
> boots.
>
> The money is coming from sidelined money that exited huge investments
> by mutual funds, etc who HAVE to make a profit to pay the promised
> returns. Annuities etc.
>
> Look at the headline this morning in the front page of the Palm Beach
> Post. Saying how many have to accept lower wages. some places are
> not laying off, just saying, "Why doncha come in only one day a week
> til things improve?"
>
> So now we begin wage deflation. And where is the money going to come
> from to continue to buy ALL the non-essential goods we have been
> buying our kids for decades?
>
> That should be enough for you to chew on. I hope that helps..
>
> PS if that is what u r haning your hat on to make an investment.
> STOP make another plan!

May 04 11:01 PM

[Sakata:]

Just how many loave of bread are you planning on buying with your gold coin? If you cannot use silver as currency for change then you better be prepared to buy a lot. If you don't need a whole lot more silver than gold to make change with then we are really in trouble because it means inflation will be going up way faster than gold.


On May 04 05:01 PM tallguy wrote:

> Interesting article.
>
> There is another refinement that may be underway, and that is the
> default to one standard, gold rather than silver as the default currency
> in preparation for the inflation that is to come.
>
> Gold is easier to store, weighs much less / $, takes up less space,
> more universally has been a currency, doesn't tarnish, is easier
> to ship, etc.
>
> Silver may be relegated to the commodities pile, with gold in the
> currency pile. China for example is classifying gold as a monetary
> asset.

May 04 11:36 PM

[DONE_SONZ:]

"In short, the miners will do relatively lousy if this is a real recovery"?? That statement makes no sense.Surely you didn't just invest in gold or the miners because of the doom and gloom scenario did you?When all this printed inflation really starts to kick in,where do you think gold will be heading?It's not south.^

Jun 11 04:59 PM

[Freya:]

In essence, if the Miners go up, then this is a rally in a Bear Market. You know, that really doesn't mean too much. I'm quite willing to go along with your premise as long as I make money.

May 05 02:10 AM

[Freya:]

Alan: CDE, NXG, HL, etc. all agree that the GSR means squat.

The ratio is for use only to justify one's position in the Bullion itself whaterever it may be.

Shares can move for a variety of reasons including analyst revisions.

May 04 11:37 AM