History repeats itself. Somebody important said so. Many silver traders and investors regard the gold/silver ratio now and think that old maxim is being proved again. Silver's gotten expensive—not just in dollars, but in terms of gold. And as silver's price has raced higher, the gold/silver ratio has plummeted.
The ratio, which describes silver's buying power by dividing the per-ounce price of gold by that of silver, has averaged 60:1 over the past 35 years, meaning it's taken 60 ounces of silver to purchase one ounce of gold. Though with silver's most recent push to the $36/oz level, it now takes much less.
The gold/silver ratio broke below 40x this week, sending silver bulls into a tizzy. A decline in the gold/silver ratio is seen as bullish for metals, a notion borne out by the last four decades of price action. Since 1977, there's been a negative correlation of 83 percent between the ratio and silver's price.
Many investors now wonder if gold's multiple is headed back down to its historic (200-plus-year) equilibrium of 16x. The last time the ratio dipped below 40x, it was a short-lived excursion. That was back in February 1998, when the ratio spent only two trading days under 40:1 before regaining its footing for a climb back to 60:1. Back in September, we measured 50:1 as an intermediate target for the breakout. The ratio reached that level in November and finally pierced it in December. A rebound in the ratio retested 50x as the new resistance, setting up the current swoon.
The gold/silver ratio is a function of the metals' price action; it is driven by the metals' prices, not the other way around. Each metal has its own fundamental and technical influences. The gold/silver ratio merely reflects their confluence. Based upon silver's out performance, fueled by investment and industrial demand, there's still room for some downside for the ratio. But a correction in the short-to-intermediate term ought to be expected. Add the oil overlay, and the potential for consolidation and/or short-term reversal increases. Higher oil prices over a sustained period can put a crimp in our nascent recovery, slowing industrial demand for silver.
The ratio, which describes silver's buying power by dividing the per-ounce price of gold by that of silver, has averaged 60:1 over the past 35 years, meaning it's taken 60 ounces of silver to purchase one ounce of gold. Though with silver's most recent push to the $36/oz level, it now takes much less.
The gold/silver ratio broke below 40x this week, sending silver bulls into a tizzy. A decline in the gold/silver ratio is seen as bullish for metals, a notion borne out by the last four decades of price action. Since 1977, there's been a negative correlation of 83 percent between the ratio and silver's price.
Many investors now wonder if gold's multiple is headed back down to its historic (200-plus-year) equilibrium of 16x. The last time the ratio dipped below 40x, it was a short-lived excursion. That was back in February 1998, when the ratio spent only two trading days under 40:1 before regaining its footing for a climb back to 60:1. Back in September, we measured 50:1 as an intermediate target for the breakout. The ratio reached that level in November and finally pierced it in December. A rebound in the ratio retested 50x as the new resistance, setting up the current swoon.
The gold/silver ratio is a function of the metals' price action; it is driven by the metals' prices, not the other way around. Each metal has its own fundamental and technical influences. The gold/silver ratio merely reflects their confluence. Based upon silver's out performance, fueled by investment and industrial demand, there's still room for some downside for the ratio. But a correction in the short-to-intermediate term ought to be expected. Add the oil overlay, and the potential for consolidation and/or short-term reversal increases. Higher oil prices over a sustained period can put a crimp in our nascent recovery, slowing industrial demand for silver.
