Brad Zigler
March 10, 2011
www.hardassets.com
History repeats itself. Somebody important said so.Many silver traders and investors regard the gold/silver ratio now and think that old maxim is being proved again.
The white metal's been, er, white hot recently. Silver's gotten expensive -- not just in dollars, but in terms of gold. And as silver's price has raced higher, the gold/silver ratio has plummeted.
The ratio, which describes silver's buying power by dividing the per-ounce price of gold by that of silver, has averaged 60:1 over the past 35 years, meaning it's taken 60 ounces of silver to purchase one ounce of gold. Though with silver's most recent push to the $36/oz level, it now takes much less.
The gold/silver ratio broke below 40x this week, sending silver bulls into a tizzy. A decline in the gold/silver ratio is seen as bullish for metals, a notion borne out by the last four decades of price action. Since 1977, there's been a negative correlation of 83 percent between the ratio and silver's price.
Many investors now wonder if gold's multiple is headed back down to its historic (200-plus-year) equilibrium of 16x.
Gold/Silver Multiple
The last time the ratio dipped below 40x, it was a short-lived excursion. That was back in February 1998, when the ratio spent only two trading days under 40:1 before regaining its footing for a climb back to 60:1.
So is the gold/silver ratio due for a similar bounce now?
It's often said that prices don't rise or fall in straight lines, but if you look at the recent trajectory of the gold/silver ratio, it's been pretty straight -- straight down. The plummet was a breakout move, an uncoiling of a spring that had been building for a year.
Gold/Silver Multiple: A Close-Up
If we look at the 50x retest as a yardstick, then the next objective ought to be 37x.
"Not too optimistic," I hear you say. Well, no, not for a straight-line decline. Trails like that ultimately lead to consolidations. And possible rebounds.
I'm only considering the market's current momentum here. Keep in mind, too, that 37x is an interim target, not the endpoint.
The gold/silver ratio is a function of the metals' price action; it is driven by the metals' prices, not the other way around. Each metal has its own fundamental and technical influences. The gold/silver ratio merely reflects their confluence.
Based upon silver's outperformance, fueled by investment and industrial demand, there's still room for some downside for the ratio. But a correction in the short-to-intermediate term ought to be expected. Amid the turmoil swirling in North Africa and the Middle East, safe-haven demand for gold could outstrip silver's industrial-driven demand.
Add the oil overlay, and the potential for consolidation and/or short-term reversal increases. Higher oil prices over a sustained period can put a crimp in our nascent recovery, slowing industrial demand for silver.
In short, the multiple could expand rather quickly, should the heat in North Africa crank up enough to put the kibosh on economic expansion.
And what of those hopes for a return -- a sustainable return -- to the historic 16:1 level? They shouldn't be dashed, but they should be tempered.
The last visit to that level was very brief; it lasted just one week over the 1980 New Year's holiday. Traders and investors alike will need to be nimble and watch for signs of topping when, and if, the gold multiple dips that low.
For now, though, keep your eye on the 37x level. We'll take a fresh look at the ratio when it gets there.
March 11, 2011
Gold Miners ETF Attempts Bullish Engulfing at Key Retracement
After a sharp decline the first four days of the week, the Gold Miners ETF (GDX) quickly
firmed on Friday with a bullish engulfing taking shape Friday afternoon (1:18PM).
Also note that this pattern formed with a low at the 62%
retracement mark.
Despite the promise for a bounce, GDX is underperforming bullion over the last few months.
Click this image for a live chart
firmed on Friday with a bullish engulfing taking shape Friday afternoon (1:18PM).
Also note that this pattern formed with a low at the 62%
retracement mark.
Despite the promise for a bounce, GDX is underperforming bullion over the last few months.
Click this image for a live chart