The gold to silver ratio is getting totally out of whack. Fundamentally and technically speaking, it is screaming “BUY SILVER”…
Right now it takes almost 78 ounces of silver to buy 1 single ounce of gold.
Just a couple of weeks ago it was under 74, but just today it had an intra-day high above 78!
The gold to silver ratio is getting out of hand again:
There are several ways to look at the above chart and say it’s screaming “BUY SILVER!”
First, there’s a head-and-shoulders pattern forming on the chart. Shoulder at 76.47, Head at 79.62, and now a shoulder again at 77.10. If there is any merit to a key indicator chartists use, the ratio should break down hard.
Said differently, if the gold to silver ratio comes down, the price of silver will surge compared to gold.
Secondly, there is a pattern of lower-highs (79.62, 78.54, 78) and lower-lows (75.49, 73.81). Chartists would say the this means the underlying (in this case the GSR) is going lower.
Finally, since early August, volume is picking up but topping since early September. This is a third indication that the ratio is going lower.
Why does it matter?
Don’t take our word for it, here’s Investopedia showing historical ratios as well as how to trade it:
Here’s a thumbnail overview of that history:
- 2007 – For the year, the gold-silver ratio averaged 51.
- 1991 – When silver hit its lows, the ratio peaked at 100.
- 1980 – At the time of the last great surge in gold and silver, the ratio stood at 17.
- End of 19th Century – The nearly universal, fixed ratio of 15 came to a close with the end of the bi-metallism era.
- Roman Empire – The ratio was set at 12.
- 323 B.C. – The ratio stood at 12.5 upon the death of Alexander the Great.
The essence of trading the gold-silver ratio is to switch holdings when the ratio swings to historically determined “extremes.” So, as an example:
- When a trader possesses one ounce of gold, and the ratio rises to an unprecedented 100, the trader would then sell his or her single gold ounce for 100 ounces of silver.
- When the ratio then contracted to an opposite historical “extreme” of, say, 50, the trader would then sell his or her 100 ounces for two ounces of gold.
- In this manner, the trader would continue to accumulate greater and greater quantities of metal, seeking “extreme” ratio numbers from which to trade and maximize his or her holdings.
Editor’s Note: It is hard to grasp the point 2 claim that a GSR of 50 is “extreme” when the same article shows a ratio of under 20 for most of history (assuming 323 B.C. is sufficient to say “most of history”)…