Is Gold /Silver Ratio Important?

February 17, 2009 | By | Reply More

One of the effects of a financial crisis in the past has often been a narrowing of the gold/silver price ratio.

In what is promising to be a recession equal or worse than the thirties, that ratio is now running true to form.

As the crisis deepens can we reasonably expect the ratio to continue to narrow, meaning that if gold continues its bull run, as is now the consensus opinion of analysts, then will silver climb faster percentage wise than its yellow metal cousin?Dealing with other factors that contribute to future projections of silver’s price performance throws up some contradictory signals that should be taken under consideration before entering this volatile market.

The technical analysts will point to the fact that two key indicators, Stochastics and RSI, are telling them that the metal is overbought.

The same has been said of gold but it has not so far stopped it bounding ahead in the last few weeks, or at least not yet.

As usual, the charts paint a conflicting picture but overall, despite being overbought, many technicians see indications that silver is in a bull trend following the path of gold.

The fact that silver is used in many industrial applications could be a potential damper on the price as demand is expected to fall away as the crisis deepens.

In the first half of 2008 when gold peaked above $1000 an ounce before falling back below $700 in November, silver dropped even more sharply from over $20 an ounce to below $9 an ounce.

This scenario saw a significant rise in the gold/silver ratio at a time when the stock market was tanking and the financial crisis was well underway, suggesting that the ratio is a lagging indicator that should be treated with some caution.

Silver’s volatility can be accounted for by the much smaller market for the metal than gold, and, as a consequence, it is easier to manipulate.

There seems little doubt that for a period in the last quarter of 2008 and on other occasions this manipulative activity focusing on the silver futures market took place in seemingly successful attempts to impede the rise in gold prices.

How this works has been dealt with in earlier articles.

In the last two years there has been a considerable growth in silver ETFs, with the Ishares Silver ETF, a major buyer of silver bullion, showing a 38% rise in its share price in the last three months as the ratio narrowed from over 80 to below 70.

In the mining sector, a significant proportion of silver production is as a by-product to mining for base metals.

The major fall in prices for base metals has resulted in a slowing of activity in the sector exacerbating the already low stocks of silver. The indications are that demand continues to outstrip supply.

We suggest that the silver market is best avoided by short term speculators who are not specialists in the precious metal sector as there is always the possibility of sudden developments in silver’s narrow market that would prove extremely difficult to anticipate.

However in the longer term, silver should prove a profitable market to investigate and action, but keep a close eye on the behaviour of gold and the price ratio.

Bear in mind that experience shows that silver prices will move faster than gold’s, particularly in a downturn.

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