52-to-1 Just Right for Gold/Silver Ratio?

By Brad Zigler

With all the market tumult recently, it's nice to be able to count on something constant. The gold/silver ratio isn't immutable, but it's been mighty steady while metals prices have been roiling.

Follow-through on Wednesday's gold rally was cut short by profit-taking on Thursday. After making fresh short-term highs in the morning floor session, June COMEX futures sold off, ending the day $10 lower. Traders cashed in a few chips after seeing the crude oil marketbackfill $4 a barrel and the U.S. dollar strengthen.

Thursday's price action was an inside day, though, which leaves room for the bulls to take prices higher.

For the week, June gold moved up more than $38 an ounce, or 4.3%, and gold mining stocks went along for the ride. The 16-stock Philadelphia Stock Exchange Gold/Silver Index's (PHLX: XAU) weekly 3.8% gain was trumped by a 4.2% surge in the broader American Stock Exchange Gold Miners Index (AMEX: GDM). The Market Vectors Gold Miners ETF (AMEX: GDX), which tracks GDM, also gained 4.2% for the week.

Gold stocks are still playing catch-up with bullion, but the metal's lead has been shrinking lately. Accordingly, ETF traders are eyeing the spread between the streetTRACKS Gold Shares (NYSE Arca: GLD) and the GDX portfolio. The price ratio (GLD over GDX) declines as mining stocks' performance relative to gold itself improves. The ratio peaked in late April, but has only grudgingly given ground.

Gold's strength is due, in part, to weakening short interest. Selling hedges by commercial traders have been unwinding at a quickening pace over the past month, making upside resistance levels more porous.

With this week's gain, leveraged gold bears were made a little poorer. The DB Gold Double Short ETN (NYSE Arca: DZZ) slipped 9.6% as of Thursday's close.

Silver was even more buoyant than gold this week. The iShares Silver Trust (AMEX: SLV) closed Thursday with a 7.4% gain. Over the past two months, gold and silver have settled into a comfortable relationship, finding a 52-to-1 price ratio just right.

We'll see how long that lasts.

Comments

[Hugh:]

I believe that a gold/silver ratio is a false issue. It really tells us nothing, simply because we can't see the future in terms of new uses FOR and new discoveries OF the metals.

All the ratio gives us is the chance to resort to the concept of, "blah, blah, blah..."

2008 May 27 03:42 PM

[Managing Ed...:]

There may, indeed, be no predictive value of the gold/silver ratio, but that doesn't mean it doesn't get watched. The ratio is closely followed by the value investors of the metal world (see "What's Better: Gold or Silver?" at hardassetsinvestor.com...).

2008 May 28 09:03 AM

[Hugh_G_Rection:]

There is a reason since 1986 the US has issued one ounce gold coins at $50 and one ounce silver coins at $1. These silver and gold eagles are establishing the ratio of 50 to 1 so when the government realizes they need to go back to a gold standard, the ratio has already exists.

2008 Jun 10 11:15 AM