There is a battle playing out in the gold to silver ratio.  It continues to deserve our attention. As resolutions lower in the ratio over the past two decades they signify the commencements of significant advances for both metals and the mining sector. The battle has given us false starts in both directions over the past two months. (green and red highlights). But again, this week we see another attempt by silver to re-exert itself as the new leader in the precious metals complex. (yellow callout):

Bullion Exchanges A - gold to silver ratio
[Charts courtesy]

The Ratio in a Topping Pattern

The gold to silver ratio remains in a pattern. It is attempting to break lower from its terminal rising wedge (blue). This is typically a topping formation in markets. What sometimes occurs in topping patterns is that a market will make an initial “false move” in a downward direction. Then, it will reverse course and punish those traders who went all-in on the initial signal. Those who fell for the “false move” then close their positions. This is just in time for the market to make its legitimate decline – without the former traders on board.

If this sounds perverse – it is.

Markets like to take as few participants along for the main ride as possible, in each direction. This “fooling” behavior is even more strongly at critical juncture points than during sustained trends.

Takeaways on the Gold to Silver Ratio

  • The ratio has once again made a second break lower through its terminal rising wedge, a topping pattern.
  • Previous tops in the 2002 – 2018 resistance zone between 80.0 – 84.0 have corresponded with significant lows in the precious metals complex.
  • If this top is to remain valid, it should not regain the boundaries of its terminal rising wedge. In numeric terms, it should not restore on a weekly closing basis.
  • Initial support for the ratio now comes at 75.0. This is the lower rising parallel (blue) trendline. More significant support comes between 72.3 – 73.5. (black callout). The ratio should not pause for more than 2-3 months at each of these support levels in a downward manner – in favor of silver – if the present situation is going to resolve in a legitimate move higher for the complex over the next 12-18 months.

Silver Holds Key Support

As indicated above, silver outperformed gold for the week. The gold to silver ratio again has threatened to break lower. Silver itself rose 0.23 cents (1.4%) to finish at $16.75. This was as of the final trade on the New York COMEX on Friday afternoon. (5/11/2018.) If this break lower in the ratio is to remain valid, it still is possible that both metals may consolidate throughout the summer. However, the lows should be in for silver under this model. The $15.70 – $16.10 initial support zone (black) should hold on any weakness. The primary silver chart is thus updated below. We will know that silver is ready to begin a serious advance when primary downtrend resistance (blue) breaks. Which, now comes in at $17.30. This is, a figure which is declining in nominal terms but not in importance each week.

Bullion Exchanges B - gold to silver ratio
[Chart courtesy]
The critical question – which will reflect in the gold to silver ratio at the appropriate time? How does silver respond when gold breaks its 2016 highs? Although silver has lagged on a relative basis for the past two years, it should now begin to show leadership on a percentage basis. This is as gold advances to challenge its sequential resistance levels.

Leading Silver Signal Remains Positive

A leading signal for silver remains strong and improving. Below, we update the Wheaton Precious Metals (WPM) indicator. The WPM features this primary silver streamer (top). The profits leverage to silver prices versus its primary product, silver (bottom). Note how WPM is again challenging its 16-month resistance zone between 21.75 – 22.50. Looking left (green highlights), we can see that in early 2017 this zone closely corresponded with peaks in the price of silver between $18.20 – $18.50. We remind short-term traders that this leading signal, in past circumstances, has at times occurred up to six months before a related “catch-up” move in silver itself. It should thus be used to gauge the potential for trend changes, but not as a timing tool for initiating leveraged trades.

Bullion Exchanges C - gold to silver ratio
[Chart courtesy]

Key Takeaway on Silver

In sum, the gold to silver ratio hinting to break lower at a multi-decade resistance zone. Additionally, with WPM challenges a 16-month level corresponding with silver nearly $2 higher than at present. The next several months follow the typical “summer doldrums” appear increasingly ripe across the precious metals sector, especially silver.

Christopher Aaron
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is third-party analysis. It does not necessarily match views of Bullion Exchanges. Readers should not consider it as financial advice in any way.

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