A Look At The Gold/Silver Ratio

Aug. 09, 2018 2:07 PM ETIAU, SLV3 Comments
Clif Droke profile picture
Clif Droke


  • Dollar strength still an issue, but gold short-covering rally likely near.
  • Silver's relationship with gold is a key factor in the near term.
  • Gold/silver ratio is close to level which precedes rallies in both metals.

Gold and silver have been big disappointments for investors thus far into August. And while the currency component for both metals remains a major obstacle to a meaningful turnaround, an examination of the gold/silver ratio suggests that a short-covering rally for both metals is likely near. We'll discuss this in today's comments.

It has been another bad week for gold as the metal fell to its lowest level of 2018 earlier this week. Consequently, investors continue to lighten their exposure to traditional safety assets. A continued rally in equity prices and a positive U.S. economic outlook have continuously weighed gold's intermediate-term outlook, putting gold investors in a sour mood regarding the metal's prospects for a rally anytime soon.

Although the financial press tried to blame the threat of higher interest rates as a reason for gold's decline, the most likely culprit is the lack of sustainable inflation that gold investors can really sink their teeth into. The lack of inflation in commodity prices, combined with a strong U.S. currency, remains the biggest obstacle to a major gold rally.

However, there's still a chance that gold will get the long-awaited catalyst that's needed to rally the metal by summer's end. That catalyst would most likely be a temporary reversal of the dollar's intermediate-term upward trend. If the global trade fears that have been waxing and waning in recent weeks finally subside, it will favor a late summer/early fall rally for the yellow metal as the U.S. dollar index would (temporarily) lose a key support and would likely pull back.

Speaking of the greenback, the U.S. dollar index (DXY) is still hovering dangerously close to its 2018 high, as you can see here. This is the main reason for gold's inability to reverse its immediate downward trend, and until DXY closes sharply under its

This article was written by

Clif Droke profile picture
Clif Droke is an equity research analyst and writer for Cabot Wealth Network. He has covered equities and commodities, specializing in gold, since 1997 and is the editor of the Cabot SX Gold & Metals Advisor.

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.

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