Gold to Silver Ratio at it's Extreme

The gold-to-silver ratio is hinting that the precious metals are positioned for a significant trend change shortly. Let us examine the setup, and the ramifications, that it may have for gold and silver prices this year.

First, what is the gold-to-silver ratio? Of course, we are discussing the number of ounces of silver required to purchase one ounce of gold.

So why is the gold-to-silver ratio important?

As a general set of principles:

• A rising Gold to Silver ratio: When gold is outpacing silver, it tends to correspond with falling prices for both metals. This is as investors seek safety in gold.

• A falling Gold to Silver ratio: When silver is outpacing gold, it tends to correspond with rising prices for both metals. This is as investors seek higher leverage that silver typically provides.

The ratio is also useful in evaluating extremes in the relationship between the two metals, which often portend turning points for prices.

Gold to Silver Ratio in Action

Below we examine the gold-to-silver ratio from 2010 through the present:   Note the significance of the extremes in the ratio over the past decade. For example:

• The 2011 top in silver at $50 per ounce was precisely at the low in the gold to a silver ratio near 30. (red callout, lower left).

• The 2015 bottoms in both gold (at $1,045), and silver (at $13.65) occurs just two months before the peak in the ratio at 80. (green callout, top center).

• The 2016 tops in both gold (at $1,378), and silver (at $21.25) occur at the minor low in the ratio at 64. (red callout, center).

What is the ratio signaling presently?

The gold-to-silver ratio is again approaching a level near 80. This is like a former major reversal in 2016. (green callout, upper right).

The 2016 surges in both metals followed that top. They were as the ratio went lower through its rising channel boundary from 2011. (blue callout). In other words, from a big-picture perspective, the gold-to-silver ratio is positioned.

This is at a level that marks significant lows previously for both metals. Let us now zoom in on the ratio since 2015. This is to gauge the possibility of timing.

Gold to Silver Ratio 2015 – Present

Again, we want you to recall that the gold-to-silver ratio sets in a position that marks previous significant reversals. Thus it has lows in both metals.

Now having zoomed in, we note a tell-tale sign of a market that is attempting to reverse lower. This market is a terminal rising wedge pattern. (blue).

Terminal wedges are a technical pattern in which we see a trend converging. Both relative lows and highs along the pattern are rising. However, lows (bottom blue trendline) are rising at a faster slope than highs. (top blue trendline).

In fundamental terms, a rising wedge indicates that sellers of the ratio may soon overpower buyers.

What Would a Breakdown in the Ratio Mean?

Although we see on the chart that the terminal rising wedge could remain valid until the end of 2018. But in practice, the majority of these patterns resolve between 2/3 to 3/4 of the way through their boundaries. In other words, we expect a move lower in the ratio to develop within the next 1 - 3 months.

In the highest probability, as you can see above by the green arrow. This is the technical setup for a second significant surge in both gold and silver. Which will follow that of 2016.

While in investing, as in life, nothing can ever guarantee an outcome. However, the above formation shows the potential for silver to start outperforming gold within the next several months. It also shows both metals to thus rise on occasion.

If and when we notice the anticipated breakdown in the ratio (green arrow), we will want to see a follow-through. We want to look at similar to what we see from 2016.

For example, in that year, the ratio was 84 ounces of silver required to purchase one ounce of gold. Then it went down to 64 within six months.

We will want to see a decline in the ratio developing this year of similar, if not greater, magnitude. A lesser decline in the ratio will suggest that the advance in both gold and silver will lack follow-through strength.

Takeaway on the Gold-to-Silver Ratio

The ratio positions at a historical extreme above 80. This corresponds with previous significant tops. Such tops in the ratio correspond with important lows in both gold and silver. The ratio is showing a classic technical reversal setup in a rising wedge formation.

The potential for a 2018 advance will confirm if the gold-to-silver ratio breaks lower from this terminal formation. That is over the next 1-3 months.

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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. The CIA 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. 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 not consider it as financial advice in any way.

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