New Lows for Gold Silver Relationship and Monthly Views

Apr 25, 2011: 9:59 AM CST

A lot of traders have been correctly focusing on the skyrocketing rise in Silver prices, but let’s look at the chart from a different angle.

The Gold to Silver relationship (a relative strength measure) just hit new lows this week and that’s a very big deal.

Let’s take a look at the last 30 years and go from there:

The chart below is a “Relative Strength” relationship chart that divides the price of gold (roughly $1,500) by the price of silver (just under $50 right now).

The chart tracks this difference over time.  The line over time shows which of the two precious metals was out-performing (or under-performing) the other.

Another way to see this chart is to ask “How many ounces of silver would buy one ounce of gold?” and right now, the answer is about 30 ounces of silver buys one ounce of gold.

In 2009, it took 80 ounces of silver to buy one ounce of gold and at the relationship peak in 1991, it took 97 ounces of silver to buy one ounce of gold.

Ok – that’s interesting, but what does it mean?

Generally, relative strength relationships ‘revert to normal’ or at least move towards equilibrium over time.

You can draw a horizontal line about the 70 area or perhaps 65 and call that the rough midpoint or ‘average’ price in the gold to silver relationship.

One might make an assumption that the relationship will soon try to come back into balance from this historical low of 30 (not seen since 1983).

If that assumption proves correct, then for the relative strength relationship to make a move up towards the mean or middle area, then we would expect a strengthening of gold relative to silver in the near future.

That can occur a few ways, some of which are the following:

1.  Silver prices fall dramatically while gold prices either stabilize or fall ‘less dramatically’ (the negative scenario)

2.  Gold prices begin to surge to ‘play catch up’ with the recent surge in silver while silver trades sideways or otherwise rises “less quickly” (the positive scenario)

In relative strength charting, the line rises or falls depending on the movement of one market relative to the other.

While both markets could rise together, the relative strength line (in this case) rises if gold increases “faster” or at a greater percentage than silver, and of course declines if silver rises faster than gold.

Of course, the opposite is true if price began to fall – should gold “hold its own” and stabilize or “fall less fast” than silver, the relative strength line above would rise.

Failure of these outcomes to happen – or for the relationships to change anytime soon – means the relationship line will continue extending in silver’s favor.

For reference, let’s look at the long-term monthly pure price charts of both gold and silver:

Silver Monthly:

From a simple math perspective, gold’s low in 2001 was roughly $300 and the current price of gold is $1,500 for a 500% increase.

For silver, price was under the $5 area in 2001, and the current price fell just shy of $50 per ounce for a 1,000% gain.

The bulk of the ‘instant’ gains – and main reason for the new low in the Gold to Silver relationship – was the meteoric rise in Silver with the breakout above $20 per ounce in September 2010 (just after Chairman Bernanke announced that new round of quantitative easing would begin in November).

From September 2010 to present, gold rallied from the $1,250 area to the current $1,500 area – a 20% rise.

In contrast over the same 8 month period, silver more than doubled from $20 per ounce to the present’s near-touch of $50 per ounce – a 150% increase.

And for fun, charting from the 2009 lows, gold traded at $700 per ounce and now has rallied 115% from the low.

Silver, on the other hand, rallied 500% up from $10 to the current $50 per ounce level.

Watch these markets together – and their relative strength relationship – for any signs of reversal or “mean reversion” in this long-term relationship.

The status quo remains if silver continues to outperform gold… but the mean reversion scenario suggests other outcomes such as a dramatic ‘catch-up’ rally in gold, or a ‘blow-off top’ correction down in silver.

Corey Rosenbloom, CMT
Afraid to Trade.com

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5 Comments

5 Responses to “New Lows for Gold Silver Relationship and Monthly Views”

  1. Guest Says:

    corey, your charts are excellent – very instructive.

  2. anuragawasthi Says:

    The Industrial demand for Silver has increased but for Gold nothing much has changed

  3. amalgamator Says:

    Hi Corey, the gold-silver ratio has averaged 40 over the last 100 years, and has averaged 16 looking much further back in time. At the last commodities secular bull conclusion in 1980 the ratio reached 17.

  4. Forex Trading Says:

    Gold and silver price always get fluctuate.i was thinking to trade with silver.But after this chart now deciding to trade with silver.Also Silver is less costly then gold.
    Thanks for sharing this news!

  5. The Current Price of Gold and the Gold Prices Chart Says:

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