What does the gold/silver ratio tell us, and is it as powerful an indicator as it seems?
Gold versus Silver…
Gold has been one of the best-performing assets in 2016. The metal mania at the beginning of the decade had died on the decline from the 2011 ALL-TIME PEAK at $1900 an ounce.
Negative sentiment and the US Dollar power had many looking for gold to go under $1000 for the first time since 2009. A short squeeze and the realization that future interest rates hikes are stalled has given the metal upside momentum as it closes in on $1300.
The halfway mark of the multiyear high to low puts $1450 as the midpoint pivot in gold.
Silver is a more industrial metal in comparison to gold. Investment and jewelry sector demand are set to climb against the first decline in global mine supply production since 2002, according to The Silver Institute.
The gold and silver commodity Exchange Traded Funds GLD and SLV have both done well in 2016 with double-digit percentage gains. Gold, however, has outperformed silver nearly two-to-one year to date.
Ratio Reasoning
The gold to silver ratio reflects how many ounces of silver it takes to buy an ounce of gold. The faster rise in gold, compared to silver, has pushed the ratio to the lofty level of 80.
This historically high gold to silver ratio not seen since 1990 can mean one of two things for the metal markets:
1) Silver is low in relative terms and is set for a bullish run to catch up to gold.
OR
2) Gold is overvalued with a downturn in order to normalize this ratio relationship.
A single factor like the gold/silver ratio at a high level should not be used to form an investment opinion on its own basis alone. The data, as compelling as it may sometimes seem, needs to be utilized in conjunction with other indicators to build a constructive case. Remember this when tempted to make a decision based solely on the gold/silver ratio.
