Is the Gold to Silver ratio ready to turn in favour of Silver

One of the key indicators in the precious metals, is the gold to silver ratio. As we’ve written before in the article “This is the century of silver“, the ratio is on average 20 to 1 on a historical basis. Going back to the Romans for example, gold coins had 16 times more value than silver coins. Also, the availability of (physical) silver 7 times the availability of (physcial) gold.

Now looking at today’s gold to silver chart, the ratio holds a nominal value between 56 and 57. What does this figure say? First, in the context of the superbull market in gold and silver that started back in 2001, its nominal value is slightly higher than average (at the upper part of a long term range). The ratio is touching it’s 200 day moving average however, which it only exceeded during the extreme market conditions in 2008/2009 and during the bottom of the equity market in 2002/2003. We feel the ratio is indicating we are on a critical juncture: either the 200 day MA will be broken to the upside, coming along with a collapse in the equity markets. Either our politicians come with a “rescue plan” to save the world (read: provide monterary stimulus, also known as Quantitative Easing) resulting in a surge in the precious metals prices. If the latter scenario plays out, then the silver price will probably be unstoppable. As we all know, the silver price is well capable of moving very sharply higher or lower in a short period of time.

Eric Sprott would argue that comparing the gold:silver ratio with the past decade is not really relevant. The well respected Mr Sprott has been telling for some time now, that this decade is the one where silver will outperform gold. So he expects to move back towards historical averages (20:1 approximately). One of the key indicators that Eric Sprott is looking for, is the fact that for every dollar invested in gold today, there is one invested in silver. That means that currently 56 times more silver is bought worldwide, expressed in a currency like the dollar, while there is only 7 times more silver available than gold.

From a market structure point of view, today’s COT reports show bearish positions not seen since the collapse of late 2008. As mentioned in an earlier article about the gold and silver price, “the commercials have the lowest net long positions while the SWAP dealers have the smallest short position” and “this bearishness is healthy for the markets because a simple spark can send the price quickly up.”

The bearish sentiment that’s visible in the COT reports, is confirmed on the silver sentiment chart above. Being for almost a year  below it’s 200 days moving average, it could be time the silver price goes north again … but it certainly needs to first show strength on the short term.

 

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