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"Be Right - Sit Tight"

Jesse Livermore
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Gold Market Wire

News, analysis and commentary for gold traders and investors

A Look at the Gold / Silver Ratio

December 28, 2020 - (Gold Market Wire) - As we are wont to say here at GMW...indicators can work well...but usually only intermittently. They rise like apparitions to indicate something and then fade into insignificance for a time. So have we done recently with the 50-day moving average. It has served us very well, but now as we have been vaulting over and under it regularly, it is diminishing in its relevance. Never believe an indicator will always work. the key is to recognize which one may be in play.

Currently, adding to the larger (and growing) picture of a Gold market poised for a resumption of bullish continuance, we note that we are sitting comfortably above that moving average. As such, every day above it helps build a bullish case. But as the indicator itself is starting to fade – having done its 'work', and so we must look at other indicators for guidance.

One of the more controversial, and yet blithely overlooked indicators forecasting Gold has been the gold/silver ratio, and it is to this that we now turn our attention.

Within the past year the gold/silver ratio has been on something of a wild ride, ranging from 128 to 69. Its worth recalling that when we soared above 120, there was no shortage of people in the commentariat opining that the ratio, as indicator, was meaningless, and that there was never any real correlation between the two metals. For us at GMW, that chorus of disapproval, alone, was enough to make us consider that the ratio was about to come into the spotlight as an indicator again. And indeed, that is exactly what transpired. As all Gold historians know $887.50 (Gold)/$50 (Silver),or roughly a ratio 18, was the marker laid down at the end of the1970s/1980 bull market. Such a historic occurrence alone demands that this ratio should maintain our attention.

We start by noting that while the ratio does not perform as a metric of absolute value in the price of Gold, one would be foolish to dismiss its relevance as an indicator of price trend. As an example, while Gold was languishing between $1050 and $1350 an ounce in the first half of 2016, the ratio's move from 84 to 64 within that time frame captured the movement in the Gold price very well. The two weekly charts below reveal this. And while the ratio lagged the start of Gold's rally, it captured the intermediate top to the day. Moreover, for trading purposes, it worked very well with the trend of the market.

Gold Price: focusing on 1st half of 2016 (weekly chart)

the ratio captured the move and called Gold's price top to the day. (weekly chart)

The ratio has had an even better performance recently as the daily charts below reveal.

Gold/Silver ratio: 2020 daily chart

Gold Price 2020: Daily Chart

There is no coincidence or luck within this type of symbiosis. You ignore the ratio at your peril. A falling ratio has been a solid signal for a bullish Gold price move, sometimes (as we have demonstrated) with extremely accurate timing. It remains relevant today, as the ratio continues to indicate the movement in Gold prices. And while we acknowledge, there is no perfect relationship in terms of absolute value, what we see is that a falling ratio indicates an upward movement in the Gold price quite well, and, ipso facto, of course, an even a stronger upward movement in Silver. The ratio, as we have seen, also picks intermediate tops fairly well, so its strength in identifying the end of a run and/or a turning point, is solid.

This should be kept in mind presently, as the ratio continues to flirt with its lows.

the Gold/Silver Ratio...

...captured the market fairly well.

Now, not every twist and turn of the market on a daily basis is taken up by the ratio. And like all indicators, there are moments of out-performance and under-performance. But the ratio works well, actually very well, at indicating trend and turning points and deserves our attention. Its continued weakness is helping us build the bullish case for the resumtpion of a continuing uptrend in Gold and Silver in the coming weeks. Equally, its reversal will indicate that we need to excercise caution.

Those that dismiss the ratio as an indicator are mistaken. It has a very good track record, over a long history.

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