Gold and silver have both been strong recently – can the gold to silver ratio break lower? For the week ended Friday, January 4, gold-finished higher by $4 or 0.3% to close at $1,285 as of the final trade on the New York COMEX futures exchange. Meanwhile, silver-finished higher by $0.35 cents or 2.3% to close at $15.79.
Gold is now up 10% or $117 from its recent August low of $1,167. While silver is up 13% or $1.93 from its November bottom at $13.86.
As we can see from these statistics, gold bottomed first during this cycle. With silver bottoming several months later in absolute terms.
Furthermore, since silver’s bottom, it has outperformed gold on a percentage basis. More than making up for its initial lag and tacking on an additional 3% when we consider the entire period in sum.
This theme – of gold leading and silver lagging, but silver eventually playing catch-up in greater percentage terms – is a primary trend to watch for in 2019.
Gold to Silver Ratio Backdrop
Let us examine the history of the gold to silver ratio (G/S ratio), measuring the number of ounces of silver required to purchase one ounce of gold.
The ratio has remained stubbornly elevated throughout 2018 and into the new year. For the week, the ratio closed at 81.8.
We remind new readers of the significance of former tops within the multi-decade resistance zone of 80 – 84 on the ratio, and how such tops have corresponded with multi-year lows in both gold and silver prices since 2002:
Yet, contrary to mainstream analysts who have assumed that this scenario would manifest again simply because the ratio was indeed above 80, we have been more skeptical.
The consensus view was especially brought into question during mid-2018, when we observed the ratio not retreat lower but instead break higher above the former resistance zone of 80 – 84. It increasingly appeared that an upward slanted inverse head & shoulders pattern (blue callouts) was forming, which would indicate silver might fall to a record low versus gold:
Closing the week at 81.8, there has been increased talk in recent weeks of a top being solidified now in the ratio. Therefore, the next major advance in both metals would be on our footsteps.
Yet to offer the balancing perspective: in our technical model, what we observe thus far is nothing more than a retest of the broken resistance zone between 80 – 84 (red callout). Shown in the upper right corner of both charts.
A New Top in the Ratio?
If we cannot call this a top in the ratio yet, what would it take to solidify such a call?
We need to see a negation of the lower boundary of the resistance zone (black) at 80, and a break of the primary rising channel (blue) at 78.
Note that the channel (blue) is still rising. So its level will converge with the 80 figure in April of this year.
Thus, 80 on the gold/silver ratio will take on increased significance over the months ahead. Again, for the week the ratio closed at 81.8.
2019 – The Year to Watch the Gold to Silver Ratio
The ratio is indeed a useful measure of investor interest in silver relative to gold.
In general, when silver is outperforming gold, this tends to correspond with stronger advances in both metals. As greater “anti-fiat” sentiment interest enters the sector.
Conversely, when silver is underperforming gold, it tends to correspond with consolidations or declines in both metals. Investors seek the stability of gold amidst bids for safety.
A break below 80 and 78 is necessary to witness a more sustained decline in the ratio and thus advances in both metals. These two levels are converging on the key 80 figure within the next four months.
The model calls for a resolution to this pattern by end-2019. It is thus our leading market indicator to watch for the year ahead for precious metals investors.
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.
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.
This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.