Brad Zigler: What’s Next For The Gold/Silver Ratio?

March 10, 2011

As silver strengthens, the gold/silver ratio has plummeted. But could North African unrest send the ratio back to higher levels?

 

History repeats itself. Somebody important1 said so.

Many silver traders and investors regard the gold/silver ratio now and think that old maxim is being proved again.

The white metal's been, er, white hot recently. 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.

 

Gold/Silver Multiple

Gold/Silver Multiple

 

To that, I say, "Let's not get ahead of ourselves."

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.

So is the gold/silver ratio due for a similar bounce now?

It's often said that prices don't rise or fall in straight lines, but if you look at the recent trajectory of the gold/silver ratio, it's been pretty straight—straight down. The plummet was a breakout move, an uncoiling of a spring that had been building for a year.

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