Gold to Silver Ratio Breaks Lower

In early March, we proposed that the gold to silver ratio was forming a significant topping pattern. So, for the ongoing precious metals to advance to remain healthy, this pattern needed to break lower. The trend in question was a terminal rising wedge. It shows below from the March 12^th article: (All charts courtesy: https://www.netdania.com) For new readers, what we are referring to in the table above is the number of ounces of silver to purchase one ounce of gold. In general, a rising ratio corresponds to falling precious metals prices. Meanwhile, a falling ratio compares with rising precious metals prices. So, in the article, we state the pattern could remain valid until late-2018 as shown by the blue boundaries. Yet in practicality most terminal rising wedges resolve between 2/3 to ¾ of the way through their timelines. In other words, we expected a resolution by June at the latest. Let’s fast forward six weeks.

Gold to Silver Ratio Breaks Lower

As of last week, this pattern has indeed resolved lower. It now looks as follows: Note the evident slicing through of the lower boundary of the wedge on Wednesday. (green callout). This is as the ratio moved from 80.5 to 78.5 in just one trading day. Specifically, while gold was up only $2 (0.1%) on Wednesday, silver was up a massive $0.45 (2.7%) in the single session. This is a final breakdown in the gold to silver ratio. It is in favor of silver. We can see from the price action last week that a move lower in the ratio has corresponded with rising silver prices. They were up 3.0% for the week to close at $17.16. Meanwhile, gold was lower by 0.7% or $10 for the week to close at $1,338 as of Friday afternoon.

What is Next for the Gold to Silver Ratio?

As we have stated in recent weeks, these wedge formations tend to represent topping patterns. Thus far these patterns look quite healthy. However, we must continue to see follow-through in the ratio lower over the coming weeks and months. It would not be surprising to see the ratio retest the now-broken boundary from the lower side. This would come just below 80.0. Under no circumstances should the ratio advance above this level as part of the more significant move downward. We must continue to witness silver outpace gold over the coming weeks and months. The ratio has a minor support level at the lower parallel channel (light blue) at 75.0. And, below that 72.5 – 73.5 is the next significant horizontal support. (black, far right). In a true precious metals bull market, the gold to silver ratio should not pause at these support levels for more than 1-3 months each.  Also, no higher peaks should show as the process unfolds. Thus, we will continue to monitor the ratio closely over the coming months. Anything else will call into question the sustainability of any metals rallies this year and into 2019.

Takeaway on the Gold to Silver Ratio

This week the terminal rising wedge in the gold to silver ratio has indeed broken lower. This is a healthy sign for both metals-- gold and silver. After 1-2 weeks of backing and filling to retest the broken trendline below 80.0, we want to observe the ratio continue lower without hesitation. Healthy precious metals advances should see both metals rising. Gold should initially lead. Healthy precious metals markets should then see a trickle-down effect. This is as once gold reaches a certain price level, investors who seek greater value should move “down the food chain” to silver. The ratio between these two metals is charitable to alert us to high probability timelines. Timelines for the most significant moves to come in the sector.

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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