Gold/Silver Multiple: A Close-Up
Back in September, we measured 50:1 as an intermediate target for the breakout ("Where's The Gold/Silver Ratio Headed?"). 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.
If we look at the 50x retest as a yardstick, then the next objective ought to be 37x.
"Not too optimistic," I hear you say. Well, no, not for a straight-line decline. Trails like that ultimately lead to consolidations. And possible rebounds.
I'm only considering the market's current momentum here. Keep in mind, too, that 37x is an interim target, not the endpoint.
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 outperformance, 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. Amid the turmoil swirling in North Africa and the Middle East, safe-haven demand for gold could outstrip silver's industrial-driven demand.
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.
In short, the multiple could expand rather quickly, should the heat in North Africa crank up enough to put the kibosh on economic expansion.
And what of those hopes for a return—a sustainable return—to the historic 16:1 level? They shouldn't be dashed, but they should be tempered.
The last visit to that level was very brief; it lasted just one week over the 1980 New Year's holiday. Traders and investors alike will need to be nimble and watch for signs of topping when, and if, the gold multiple dips that low.
For now, though, keep your eye on the 37x level. We'll take a fresh look at the ratio when it gets there.
- The quote is often attributed to George Santayana, although he actually said, "Those who cannot remember the past are condemned to repeat it."