Monday, July 1, 2013
The Gold/Silver ratio has been used by many traders and analysts as a way to gauge whether Gold prices are historically "cheap" or "expensive" relative to Silver. As of this writing, the Gold/Silver ratio was running just under 63 to 1, which means it takes about 63 ounces of Silver to purchase 1 ounce of gold. Looking at data for the past 30 plus years on this ratio, we have seen extreme readings of 14 to 1 back in 1980 during the infamous " Hunt brothers Silver squeeze," and a reading of just over 100 to one back in the early 1990's. Readings between 40 and 70 to 1 have been within the average range since the mid-seventies, which implies that the current 63 to 1 ratio is showing Silver prices becoming oversold vs. Gold prices, but not yet at price levels that can be viewed as extreme.
The media is abuzz regarding the sharp sell-off in Gold prices, but much less is being reported about its precious metal brethren Silver, which has experienced a much sharper price decline. Since recent highs were made back in late August of 2011, lead month Silver prices have declined by just over 60%, and are now trading just above $19 per ounce after falling to nearly $18 on Friday -- which is a price level not seen since the fall of 2010. Similar to Gold, the Silver market is experiencing a bout of long liquidation selling pressure tied to concerns that the Federal Reserve may begin to reign in its aggressive stimulus measures -- possibly as early as this fall -- as well as signs that inflation expectations remain subdued. Silver has historically been viewed as a much more speculative alternative to Gold, as its relatively lower price has attracted more small speculators to this market. The smaller size of the physical Silver market also has led to historically higher price volatility, which seems to be playing out in the recent performance for Silver prices during this historic precious metals bear market.
Looking at the daily continuation chart for Silver futures, we notice prices failed to hold at the 20.00 price level, and have since moved sharply below this key psychological support area. If we go back in time to 2009, we note that Silver prices spent nearly 12 months trading in a relatively narrow $5 range between 15.00 and 20.00 per ounce. This consolidation pattern occurred prior to the most recent price run-up that took lead-month Silver prices to nearly $45 per ounce. Momentum is currently very weak, with the 14-day RSI well into oversold territory, with a current reading of 19.97. This oversold reading on the RSI may set the stage for a bout of short-covering buying, especially with Friday's higher close after prices fell to multi-year lows. Friday's low of 18.170 is now viewed as support for September Silver, with resistance found at 20.175.
Mike Zarembski, Senior Commodity Analyst