Gold and a Falling Gold/Silver Ratio

In today's market review, gold has fallen further over the past week. It fell from the correction zone between $1,283 - $1,301. This constitutes an ideal 38.2% - 50.0% Fibonacci retracement of the July through September advance. However, as discussed in the gold update two weeks ago, the precious metal could fall all the way back down to $1,240. At this juncture, it would not violate the technical model. The message of the market remains: gold is retesting the breakout from its long-term 2011 – 2017 trendline. You can see this below in the magenta color. The retest zone highlights in green for greater clarity on the intermediate-term chart: For the week as a sum, gold fell nearly $10 (0.8%) to close at $1,275 as of the final trade on the New York COMEX. This is for the December futures contract. Interestingly, silver bucked the gold trend and came in higher for the week. The figures are 0.11 cents (0.7%) to close at $16.79. This represents a fall in the gold to silver ratio over the short term. (The number of ounces of silver required to purchase one ounce of gold.)

Market Review Lessons from a Falling Gold to Silver Ratio

The important action in silver versus gold last week warrants an updated look at this important ratio. (For the chart below, we must switch over to the trading desk. It allows us to view intraday price data. This is the opposite of COMEX-only price data, as our usual provider.) The important points to recall regarding the gold to silver ratio from 2011 through the present:

• • The 2011 – 2016 rising channel in the ratio generally corresponds with falling precious metals prices. Gold holds its value better on a relative basis.
  • The significant 2016 surges in both gold and silver occur amidst the ratio breaking lower through the ascending channel in April 2016. It fell from 84 down to 64 ounces of silver to purchase one ounce of gold by July 2016.
  • Since July 2016, both metals have come correct in price. The gold to silver ratio has been in a generally rising trend again.
  • At a depth of silver’s Flash Crash in July, the ratio peaked at 85. This is just touching the lower broken boundary of the 2011 – 2016 channel. This was a retest of the faulty channel, labeled on the chart. It represented a spike high – a level which was quickly rejected by the market.

Again, the 2011 – 2016 rising channel was decisively broken during 2016’s metals surge. This was an important signal of a long-term trend change, of which we are still in the early stages. We expect the next significant surge in both metals prices to occur when the gold to silver ratio breaks lower. Which is from its rising secondary trendline. This will show on the chart above beginning in July 2016. Currently, this level would come in at 70 ounces of silver to purchase one ounce of gold.

Takeaway on Precious Metals Prices This Week   

If indeed the low for the present retracement has been seen as of Friday with gold touching $1,260 and silver dipping to $16.30, gold will have corrected. This correction falls still within the valid retest zone of its long-term 2011 – 2017 downtrend. The outperformance of silver on Friday is an early positive sign for the sector as a whole. We continue to expect gold will eclipse its 2016 high of $1,378 on the next primary wave higher. Meanwhile, silver may lag on a relative basis concerning the time required to break its high of $21.25. Any such lag in silver should be an opportunity.  

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. Technical analysis shares many similarities with mapping. They both base on the observations of repeating and embedded patterns in human nature. His strategy of blending behavioral and technical analysis has helped him and his clients. It helps to identify both long-term market cycles and short-term opportunities for profit. This article is a third-party analysis. It does not necessarily match the views of Bullion Exchanges. Readers should consider it as financial advice in any way.

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