For what seems like ages, I have been waiting for the price of silver to breakout to the upside. Some false starts in the last few years provided hope but ultimately dashed my dreams of silver price reaching its historic potential. Finally, however, there are serious indications that silver's recent price slump is about to end for real.
Charting The Changes In The Gold/Silver Ratio
Keeping it relatively simple, I will examine some factors that are forecasting a rise in the silver price.
The 30-year gold to silver ratio is shown in the following chart.
Note that in the last 30 years when the gold/silver price ratio reaches 80, a reversal usually occurs and silver becomes more valuable relative to gold. This translates to silver prices rising higher relative to the same rise in gold prices.
The exception is 1990 when the ratio reached 100 to 1 instead of 80 to 1. In 1990, silver was mired in a 40-year low trading range, which lasted for nearly 20 years from about 1987 to 2004, when silver began to rise again prefacing the 2008 financial crisis. The gold/silver ratio stayed high despite the rise in silver price because gold was rising faster in the same time period.
In two of the three cases, the ratio reversed to about half of the peak value. In 1996, the ratio reversed from 100:1 to under 50:1, meaning that silver became twice as valuable relative to the gold price. In 2010, after the most recent financial crisis, the ratio reversed much more severely than in previous instances. The severity of the ratio reversal appears to be related to the depth and length of the recession, as indicated in the chart.
Also note that previous ratio peaks occurred during a recession or just after. We can surmise that silver becomes more valuable after a recession occurs. Silver is more volatile than gold, and therefore when gold moves up after economic worries increase, silver tends to move in the same direction in more violent swings.
We can also surmise that the ratio is somewhat an indicator of a recession, in some cases reaching its peak during the recession or just after it. Because we are now at 80:1, the ratio appears to again be predicting another recession, albeit exactly when we do not know.
In 2018, we are technically not in a recession and therefore it can be said that the ratio could run substantially higher before it finally reverses, if the 30-year history of the ratio is an accurate predictor. However, the 80:1 ratio is a strong resistance point to the ratio running much higher, and one could reasonably expect the ratio to be pointing to a near-term reversal. This would, in other words, be the right time to begin betting on silver again.
One other thing to note from this chart is that the ratio always suffers a short-lived dip right before peaking, which most recently did occur a few years ago and may be predicting an impending top right around the corner this time. Time will tell us how close we actually are to the next silver price surge.
The following chart of silver prices with moving averages of 50, 100, and 200 may be quite instructive to shorter-term direction of silver prices.
Both the 50 and 100-day moving averages are intersecting the 200-day moving average to the upside. When these averages have traded above the 200 day, silver prices have risen. If the 50 and 100 both move strongly above the 200-day line, then it is likely signalling a strong upside price move in silver and will likely solidify the official reversal of the gold to silver ratio.
If the 200-day moving average is not substantially breached to the upside, then silver prices are providing a false alarm and the gold silver ratio will likely continue inching a bit higher and testing the 80:1 ratio resistance line even more. This chart bears watching closely in the coming months as to where the gold silver ratio is headed.
Silver Bear Market History
The following two charts, originally posted at The Daily Gold, cover silver bear markets in relation to one another and are strongly indicating that the recent silver market slump is just about over.
Source: Commodity Trader Mantra
Silver bear markets since 1980 are charted for length, and the current bear looks to be stretching its paws and preparing for its next nap. If history is any indication, the current silver bear is just about over. What happens to silver price after one of these lengthy bear markets?
The chart indicates that the bull tends to run hard and fast to the upside in the following year, when the reversal comes.
The US dollar index, DXY, is testing some key resistance levels to the downside as shown in the following chart.
The dollar is perched right on an historic trend line that could signal weakness not seen since the financial crisis and the sharp increase in inflation rates between 1987 to 1992. Rates surged from 1.46% in 1986 to a high of 5.65% in 1991. If the dollar falls substantially below its current values, then inflation will likely rear up and cause a significant flight into precious metals, pushing the prices higher and fueling the flames of a serious silver price rally.
Inflation rates have recently ticked up substantially. Though inflation increases are not strong enough on the upside yet to predict a dollar crash, they have lasted long enough to indicate relative dollar weakness to other currencies. Further increases in inflation will likely signal a weakening US economy. Inflation appears to be setting up a precious metals bull market. Source: US Inflation Calculator
Silver Price Prognosis
If we are indeed headed into a recession and not just a cyclical correction, and the gold silver ratio is finally turning to the downside, then expect silver investors to become very happy in a short period of time. The price tends to move more quickly than gold and investors can get caught waiting to catch their breath. The key to capitalizing on these steep cyclical movements in silver is to be ahead of the curve and not try to jump on the moving train, at least if you want to maximize your returns.
If the current indicators are only centered around general dollar weakness, then this could be a head fake and gold prices should remain relatively strong compared to silver, which will continue its recent range trading.
Given overall debt levels, budget deficits, and reversals in US debt purchases by outside sovereigns, I feel these indicators are aligning for a bigger, more ominous reason. And that reason will drive silver prices significantly higher in coming months, perhaps even within the 6 to 12-month time frame.
If you are going to make a move into silver before the bull begins, now would be an opportune time to take a position, watch the data, and stay patient for the coming bull market.
The wait for silver investors during this recent bear market may finally be coming to a long sought end.
Disclosure: I am/we are long ISVLF, KOOYF, NHVCF, SVCMF. 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.
Additional disclosure: Also long physical gold and silver.