There is a battle playing out in the gold to silver ratio – and it continues to deserve our attention, as resolutions lower in the ratio over the past two decades have signified the commencements of major 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):
The Ratio in a Topping Pattern
The gold to silver ratio remains in a pattern whereby it is attempting to break lower from its terminal rising wedge (blue), 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, only to 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… 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 regain0 on a weekly closing basis.
- Initial support for the ratio now comes at 75.0, 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 as the gold to silver ratio again has threatened to break lower. Silver itself rose 0.23 cents or 1.4% to finish at $16.75 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, and 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) is broken, which now comes in at $17.30, a figure which is declining in nominal terms but not in importance each week.
The key question – which will be reflected 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 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, which features this primary silver streamer (top) whose profits are leveraged 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 prior to 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.
Key Takeaway on Silver
Taken in sum, with the gold to silver ratio hinting to break lower at a multi-decade resistance zone, and WPM challenging a 16-month level corresponding with silver nearly $2 higher than at present, the next several months following the typical “summer doldrums” appear increasingly ripe across the precious metals sector, especially silver.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency, 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 provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.