By Brad Zigler
Boy, what a morning! Gold jumped $31 at the COMEX opening, while silver was up half a buck. Things got more bullish from there as traders, prodded by just-announced dimensions of the dollar-busting quantitative easing program, flooded in to grab metal warrants hand over fist.
A good time, methinks, to assess the gold/silver ratio and its trajectory to the 50x multiple envisioned earlier ("How To Trade The Gold/Silver Spread") and its follow-on ("Where's The Gold/Silver Ratio Headed?").
At yesterday's close, the gold/silver multiple, basis the December contracts, stood at 54.7x, substantially below the 64.4x level seen at the top of September. With exchange-minimum margin requirements, that translates to a 364 percent return. Not bad work, as my Dad used to say, if you can get it.
Gold/Silver Spread
(Click to enlarge)
This morning's price action, featuring December silver above $25.70, brought the ratio down to 53.5-to-1. So there's still room for the ratio to sink further and, in Dad's terms, for the work to get better.
Experience has taught me, however, to use market action as a means to reduce risk. A trader with a single spread position doesn't have room to lighten his/her exposure, but traders of size positions do. Size traders typically take their money — their original stake — off the table and speculate only with the market's money. Markets like today's provide a perfect opportunity to lighten risk exposure.
Translating the gold/silver ratio to a relative strength reading helps a trader better envision how close silver is to its objective. Think of the relative strength index as a more mathematically sophisticated — and inverted — price ratio. It expresses silver's cumulative underperformance relative to gold as a negative number and outperformance as positive.
Silver's Strength Relative to Gold
(Click to enlarge)
Based upon trading benchmarks, a 50x gold/silver multiple translates to a relative strength reading of -7.6. This morning's price action dragged silver's strength up to the -8.2 level. If you've got multiple positions, it's now time to consider taking your grubstake off the table, leaving only your profits at risk if you feel silver can strengthen further.
Disclosure: No positions
