Silver and Gold

These two commodities have been the focus of a lot of attention lately. And rightly so, they have had enormous moves in both the the long term and the short term. But the focus recently has been about whether they are at a top, either short term or long term and which is the better metal going forward. I don’t know if either is at a top and based on current monetary and fiscal policy probably neither are at a long term top yet. But there is something interesting about their relationship to each other that tells me something about the short term relative direction of the metals.

The Gold:Silver Ratio

Look at the chart below of the ratio of Gold to Silver over the last 15 years below.

This chart shows that the ratio of Gold to Silver has had long term support at a level between 45 and 46 over this period bouncing off of it 5 times in the past 15 years. Notice that this level was touched again recently and held. Finally notice that there has been an area of support and resistance near a ratio of 56. I look for the ratio to move back to this level slowly. This is approximately a 20% move in the ratio. Also note that it has taken about 2 years to move from the 46 level to above the 56 level each of the last two times that it bounced. What does that mean for the price of Gold and Silver? This ratio can be adjusted in three ways. First by Gold alone moving, second Silver alone moving, and third a combination of the two (You can substitute the charts and and prices for the Gold ETF, GLD and the Silver ETF, SLV for the commodities themselves and reach the same conclusions).

Gold Alone

Gold today is at about $1370/oz. For the Gold:Silver ratio to adjust by 20% solely by the price of Gold moving up 20% would require Gold to move up to $1644/oz. Look at the 10 year weekly chart for Gold below.

It certainly seems possible for Gold to continue its trend higher and to reach 1644 even within six months! In fact over the 2 year period projected forward Gold could reasonably be at $1822 on the lowest dotted support or $2000 or $2275 from the higher levels. These are moves of between 15% and 29% per annum, large but not unheard of from a commodity that is up about 25% this year. In this scenario there would actually be room for Silver to rise over this period to between 2% at the low end and 40% at the high estimate to between $29.50 and $40/oz.

Adding in Silver

With Silver at just under $29/oz. if the adjustment of the ratio were to get to 56 this could be accomplished by Silver moving down to$24.50/oz if Gold were to stay in place. Look at the chart for Silver below.

This chart shows that since April 2004 there have been 3 J-Patterns in Silver. Dropping from a peak to a trough and then curling higher to a new high before repeating. These patterns have taken slightly over two years to complete. I have hand drawn in a potential continuation of the pattern which shows a pullback and rise to $40/oz after two years. If Silver were to pullback as far as 19.35/oz then Gold could also have room for a short term pull back. If Silver were only to pullback to the $26 or $21.44 level then there is some room for Gold to retrace and then move higher.

Conclusion

Gold and Silver have been correcting lately, and this correction has started to relieve some of the pressure on the Gold:Silver ratio. But there is room for this ratio to correct without much of a down side correction to either Gold or Silver. In fact if they continue along their long term uptrends, but the pace of growth declines, both metals can continue to rise. The Gold:Silver ratio moving back to its longer term trend will not be what brings these high flyers back to earth.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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