A Brief (in Cosmic Terms) History of the Gold/Silver Ratio

• Posted by Greg Harmon
• on February 24th, 2011

Gold has been flying lately and is approaching new all time highs. But it is Silver that is really on fire reaching 30 year highs. Traders often look at the ratio between the two metals trying to determine relative value and then buying the cheap one and selling the expensive one. Let’s take a look at this ratio. Below is a chart of the ratio for the last 10 years.

Notice that this chart has bounced around in quite a range but has recently broken below a 5 year floor at a ratio of about 45. As it does this the Relative Strength Index (RSI) of the ratio is becoming technically oversold, but the Moving Average Convergence Divergence (MACD) indicator has recently reversed and turned negative again. All of the Simple Moving Averages (SMA’s) are also pointing lower. Will this break down hold? Lets look a bit further back in history.

The next chart shows this ratio (inverted) for the period from 1975 to 2005, 30 years. Notice that since 1984 the ratio has remained below 0.02, the equivalent of remaining above 50 in the previous chart. So the 45.00 floor has actually held for over 27 years! But prior to 1984 there were a couple of spikes, one to an extreme of 0.056 or the reciprocal equivalent of 18 from the top chart. So it has been lower in the past. Perhaps the ratio is heading back to a lower range. But was that lower range an aberration or have the levels of the ratio over the last 20 years been the outlier? One more chart can explain.

This chart shows a 650 year history of the price of Silver and the ratio of Gold to Silver prices. The yellow line and scale on the right are for the price ratio. In this long run view notice that prior to 1850 the ratio has remained between 16 and 20 for about 500 years. Now that is a long term channel! So back to our question can the breakdown of the ratio below 45 hold? History shows that the run lower may just be getting started. Trade’m well.

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

long term charts from chartsrus.com

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