Categories: Precious Metals
Topics: General Precious Metals

Silver Continues to Outperform Gold

For more than two hundred years, the average of the Gold/Silver price ratio has been about 30 to 1, and more recently (since 1997) the ratio has been averaging about 60 to 1. The ratio simply means that it would take about sixty ounces of Silver to equal the value of one ounce of Gold. Interestingly, as of today (10.15.09), the ratio stands at 59.27, very close to the average ratio of the last twelve years. Let’s look at a price chart that covers that dozen-year period and see if we can’t make an educated decision about the probable direction for this critical ratio, and, while we’re at it, also seek to determine how to profit from the current trend in the Gold/Silver ratio.

 Graphic credit: Metastock v. 11

A Ratio in a Range

If you’ve been an investor and/or trader for any length of time, you’ve probably heard the term ‘go with the trend’ on more than one occasion. And, generally speaking, the ‘easiest’ (although successful trading and investing is likely to be the hardest ‘easy’ money you’ll ever make) times to turn a profit in the financial and commodity markets is to get on board a strong trending move during a periodic pullback against such a trend, letting a continuation move of the trend progressively increase the value of your investment. Now look at the chart above, one that depicts the monthly Gold/Silver ratio (cash price basis) since 1997. One of the most obvious features of this chart is the strong upper resistance line that connects the three most recent swing highs. The line encompasses the range from 83 up to 85 and suggests that this is the upper level for the Gold to Silver ratio, barring some unforeseen change in the fundamental characteristics of these individual metals markets. Now look at the lower portion of the chart and witness the strong area of support that exists between 43 and 45; a blue support line connects the two recent swing lows, suggesting that the ratio may indeed find solid support in that general range, should it continue to keep falling. For whatever reason, once these Gold/Silver ratio swings commence, they tend to keep going until they hit the prior area of strong support/resistance. Perhaps the current downswing will also follow suit, dropping back down toward the 45-43 area, which could be a major boon to Silver traders and investors everywhere.

Powerful Downswing in Motion

If you will, direct your attention now to the individual price swings, all of which have been highlighted with either a gold arrow for ‘up’ or a red arrow for ‘down.’ Note how that once a swing move (up or down) begins, it typically carries forward with a great deal of momentum, with most moves lasting from one to three years. The last complete downswing took nearly three years to complete, with the ratio declining from 84 all the way down to 44 – nearly a 50% decline. If you’ll recall, this was the period when Silver began a massive, multi-year bull move from a sub-$5 breakout pattern, and, even though Gold was also rising in tandem with the white metal, Silver’s move higher was far more dramatic in percentage terms. Now, shift your gaze over to the right side of the chart (also know as the ‘hard right edge’) and note the powerful downswing already in motion in the ratio; it’s already declined from 85 to 59 and with the same kind of intensity previously seen in prior downswings. If the length/duration of past swings continues to be applicable to this latest thrust lower, we may very well expect to see the Gold/Silver ratio test that lower support line within the next six to twelve months. And if the ratio completely breaks down, bursting below 43 on a monthly close, we might actually witness a new attempt of the ratio to drop down toward the long-term historical ratio of about 30 to 1. Clearly, in such a case, it would be far better to own greater amounts of Silver and the shares of Silver mining companies than it would be to own Gold or shares in Gold mining companies.

What This Means in Practical Terms

For the average investor, this chart has a number of practical uses. Since you have a choice of whether to allocate investment funds to Silver or to Gold, whenever you see a high probability Gold/Silver ratio trend in motion (as we have right now), and that the trend is moving lower, a wise investor would bias the bulk of his/her precious metals funds toward Silver rather than Gold. Since we know that the ratio has a high probability of trending lower for some time, a conservative investor might decide to put 35% of his funds to work in Gold and 65% in Silver. There are a variety of ways to purchase and store either of the precious metals, and, if you time your Gold/Silver ratio metals purchases wisely, you may do very well as the long-term bull market in these two metals continues to progress toward new highs. Those who simply desire to hold Silver by way of the Silver ETF (SLV) can use this chart to great advantage as well. Precious metals equity traders might simply bias their investing and trading activities toward the particular metal that is currently outperforming, focusing on the mining shares of the companies that mine Silver either as a by-product or as a primary mining operation.  Since Silver is outperforming Gold, that might mean attempting to buy silver mining companies on normal pullbacks toward support. Since the future of the metals market is unknowable, however, it would also pay to trade/invest in Gold and Gold mining shares and ETF’s as well, just in case the ratio begins to reverse in favor of Gold at some point.

Spend some time every month analyzing the current state of the Gold/Silver ratio, a ratio that has served savvy traders very well for many, many years. Learn to put it to good use in your own trading and investing activities and see if it doesn’t also help fatten your bottom line as well.

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Mark Brown