Gold And Silver - Watch The Ratio

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Includes: AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GEUR, GLD, GLDI, GLL, GTU, GYEN, IAU, OUNZ, PHYS, PSLV, QGLDX, SGOL, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: Lawrence Williams

Summary

A high gold silver ratio is bad for silver investment vis-a-vis gold, but the reverse is also true.

Currently the Gold:Silver ratio is trending down nicely which means silver is at last rising faster than gold.

In a rising gold price environment silver tends to act like "gold on steroids."

There has been a fair amount of recent commentary suggesting silver's fundamentals are not as strong as those for gold, and the Gold:Silver ratio ("GSR") has remained uncomfortably high for silver investors. But there are signs alongside gold's recent upwards move that silver is beginning to react a little more positively. As I write the GSR has come back to 78.3 after being at over 83 back in February, which means that silver is currently advancing faster than gold, as it tends to do in a gold bull market.

Followers of silver will tell you that in a rising gold market silver is apt to move 'like gold on steroids', but in a falling gold market it does the opposite and, indeed during gold's recent four and a bit year decline silver investors have tended to fare far worse than those invested in gold, but that hasn't stopped silver aficionados buying. Physical silver, particularly in coin form, has been being snapped up putting pressure on supplies and silver ETFs have generally performed better than gold. That is because they anticipate better leverage in the lower priced silver than in gold.

Writing here back at the beginning of March See: Gold/Silver Ratio: Silver Performing Badly - Time To buy? (when silver was at around $14.80 an ounce and the GSR still around 83) we picked up on some, as it proved, prescient last advice from the late, great, Ian McAvity whose technical analysis was much followed. He recommended that if you can get an ounce of gold for 40 or less ounces of silver you should take the gold. On the other hand if an ounce of gold can be exchanged for 80 or more ounces of silver, take the silver. This suggested something of a range between these two levels and would at least have proved to be good short term advice back on March 1st with the GSR coming back about 7% since then.

Silver bugs will be looking for the ratio to fall far lower still, but we don't see some of the kinds of levels they are looking for as realistic. In the past 20 years the GSR has only once spiked down to below the 40 level and that was very shortlived when silver hit almost $50 an ounce in late March 2011, subsequently admittedly brought back down very sharply indeed by some remarkable trading on the COMEX futures market. That's not to say this 40- ratio couldn't happen again, but we do see it as unlikely. But if gold continues to advance we do see a GSR level of perhaps 50-60 as a distinct possibility, depending on how long gold may continue to advance. Even at a 60 level, if gold hits $1,400 as some analysts are suggesting (although this is at the upper levels of most analysts' current predictions) that would imply a silver price of over $23 - a rise of around 45% compared with a parallel gold price rise of 11%. That's the appeal of silver in a rising gold price environment. However carefully selected gold stocks might well produce an even better return!

The graphical presentation below is from the great charting siteMacrotrends.net showing the Gold:Silver ratio over the past 30 years which we can take as a guide to the kinds of levels we might expect to see moving forward.

Graph of The Gold:Silver ratio 1986-2016.

Click to enlarge

Source: Macrotrends.net and LBMA

As can be seen, apart from the big downwards spike in 2011 referred to above, the GSR has remained above 45 and below 100 over the period, with an average nearer 65. Apart from a big run up to close to 100 in 1990, in general the GSR has topped out around 80 and fallen back to the 45-55 level at its lowest point, before turning upwards again. Providing gold retains its current upwards momentum we would expect the GSR to follow this same pattern again but on normal past performance perhaps a fall below a GSR of 50, a slightly more conservative figure than that suggested by Ian McAvity, would to us provide a strong sell signal if it occurs. History does tend to repeat itself and now may not be an exception.

But please don't expect the ratio to fall to its often-mentioned so called 'historical' level of 16:1. Apart from during the Hunt Brothers ill-fated attempt to corner the silver market back in 1979/80 and also very briefly in 1968, it has not fallen to this kind of level since the time that silver and gold were both used as mainstream monetary metals. Some very specific 'black swan' event might see it happen again, but in our view this is highly unlikely.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.