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The gold-silver ratio is the relative valuation of the two precious metals, and in consideration of the described trading pattern it can provide an indication of the maturity of a bull or bear cycle. Market tops for gold and silver are typically accompanied by low gold-silver ratios (silver outpacing to the upside), and market bottoms are typically accompanied by tops in the gold-silver ratio (silver outpacing to the downside). So what is the gold-silver ratio saying these days?
The above comments, and those below, have been edited by munKNEE.com (Your Key to Making Money!) for the sake of clarity [] and brevity (…) to provide a fast and easy read and have been excerpted from an article* by Itinerant as posted on SeekingAlpha.com under the original title A Silver Lining For The Gold Price? which can be read in its entirety HERE.
The Gold-Silver Ratio
Gold and silver prices are often seen as moving in tandem, with silver outpacing gold to the upside in bull markets, and to the downside in bear markets. The chart for gold and silver prices below illustrates this observations on a long-term scale.
Gold Price in US Dollars data by YCharts
Historical Gold-Silver Ratio
The chart below shows the gold-silver ratio going back to end of the gold standard in the early 1970s. The gold-silver ratio exceeded 80 only once for any amount of time, namely in the correction following the silver price manipulation by the Hunt brothers in the early 1980s. Apart from that the gold-silver ratio has mostly remained in a range between 40 and 80, and has been a fairly reliable indicator of market tops and bottoms.
The Gold-Silver Ratio Has Bottomed
We observe that the gold-silver ratio bottomed out when the silver and gold prices hit their most recent tops in 2011, and has been rising steadily since then. The chart below shows the gold price (black line) and the gold-silver ratio (red line) in more detail for this latest bear market period. The green lines are forming an ascending triangle pattern with outlines provided by the long-term rising trend line, and resistance at around 75. [Sept. 2 update: Resistance has been broken. Gold:Silver ratio as of today is 77.8.]
(click to enlarge)
From a technical point of view a sharp break-out from the forming ascending triangle can be expected in the not too distant future, quite probably to the upside and taking the gold-silver ratio into the 80+ region. This would represent the upper end of the long-term range for the gold-silver ratio, from which the trend has reversed quite sharply on several occasions before. Such a scenario would entail silver prices to under-perform gold prices for one last time, before the onset of a role reversal where silver should outperform gold — which would be the typical symptom of a precious metals rally.
In terms of fundamental factors we believe that industry demand for silver will continue to grow, and we foresee that it will continue to put a floor under the silver price in the longer term. Ultimately, the growing proportion of silver being consumed in industrial applications may well lead to a de-coupling of gold and silver prices in the future.
Conclusion
Based on various considerations, including our observations of the gold-silver ratio, we currently favor a scenario of final gold price capitulation which would quite probably drag the silver price down with it. The gold-silver ratio might well head sharply higher to the 80+ region during this capitulation phase completing its journey to the upper end of its long-term range.
*http://seekingalpha.com/article/3359175-a-silver-lining-for-the-gold-price?ifp=0
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