The gold to silver ratio, or the number of ounces of silver required to purchase one ounce of gold, is within a window of approximately 6 to 9 months whereby it will either strongly confirm or strongly deny the arrival of a new bull market for both metals. One way or the other, this should be a major signal that does not leave any guess-work necessary as to the metals’ next primary trend.
Closing this week just below 83.9, the gold to silver ratio remains stubbornly elevated in favor of gold. Thus indicating that investors in sum see little “precious” value in silver. Instead, having relegated it mostly to the realm of an industrial commodity over the last two years.
Of course, in order to profit one must disagree with the sum of the market. If the majority of investors already valued silver for its safe-haven properties, the opportunity for profit would be behind us. Still, this analysis will help us to gauge the timing of the expected re-awakening for silver’s historical monetary status.
Gold to Silver Ratio Pattern
A significant concern is that the gold to silver ratio is now making its second attempt to break higher within the last two months from a multi-decade resistance zone between 80 – 84 (red circle, chart below). We can see how critical this resistance zone has been for the sector since 2002. As each time the ratio entered the 80 – 84 zone in the past silver buyers showed up en masse to bid silver higher over the subsequent years.
Further, the resultant multi-year declines in the ratio in favor of silver represented the strongest price gains for not only silver but also for gold. Generally, when silver is outperforming gold, both metals tend to be in rising cycles. However, when gold outperforms silver, this typically corresponds with declining cycles.
Inverse Head & Shoulders Pattern
The ratio continues to follow a linear trend higher (above, blue lines) which began in July 2016 and now comes in at 77.0. This trend now meets with the multi-decade resistance zone (black), and so one of these levels must necessarily break shortly.
For the sector to remain bullish, the ratio must back down immediately from the present level, or else it will trigger a multi-decade inverse head & shoulders pattern (blue callouts), which would target a level of 138 ounces of silver required to purchase one ounce of gold by 2023.
This target for this pattern is calculated as equal to the amplitude of the head (84 peak – 30 bottom = 54) added onto the breakout point (84 + 54 = 138).
View the gold to silver ratio chart above. The right shoulder portion of the pattern is indeed higher (i.e. slanted) in comparison to the left shoulder. This is perfectly acceptable within technical analysis. Also, it indeed portends to an even more powerful resolution than if the shoulders were evenly proportioned.
Takeaway on the Gold to Silver Ratio
The bottom line is that silver investors – and all precious metals investors in sum – should want to see this ratio move lower immediately and decline through 77.0 within the next 6 to 9 months.
The gold to silver ratio is again near the upper limit of a multi-decade resistance zone. Any further movement higher would signify a market that is preparing to revalue silver. Much lower compared to gold than at any time over the previous two decades. This will not be a short-term trading signal, but rather a multi-year or multi-decade revaluation of both metals. The opportunity cost of holding silver versus gold would become a consideration for the private investor in such a scenario.
Silver still has the opportunity to perform. It can show an initially positive start by breaking above $15.00 this week.
The gold to silver ratio could still resolve positively (lower) from its multi-decade resistance zone within the next 6 to 9 months. To do so, silver must either out-perform gold as both metals move higher in 2019 or fall less on a percentage basis during whatever final decline in price may remain.
However, the time window for silver to prove itself is narrowing.
We will be publishing a special article when this situation resolves. Either negatively (above 84.0) or positively (below 77.0). Along with an outline of potential ramifications for individual investors at that time.
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.
Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.