What the Silver-Gold Ratio Nearing the Modern-Day High Means For Investors

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July 18, 2019 1:09pm NYSE:GDX NYSE:GDXJ


  • Silver lags gold- The ratio hits a high on the quarterly chart
  • More room on the upside based on the monthly and weekly charts
  • GLD and SLV can replicate the ratio 

Gold and silver have long histories dating back to biblical times as mean of exchange, stores of value, and currencies. The first Egyptian Pharaoh Menes stated that two and one-half parts silver equal one-part gold in around 3000 BC, which is the first documented quote for the silver-gold ratio. In modern times, since the 1970s, the ratio has traded from lows of around 15.47 to over 100 ounces of silver value in each ounce of gold value. The ratio tends to decline during bull markets and increase when precious metals prices are under pressure. That is why it is odd that the price relationship between the two most closely-watched precious metals is near the highs after gold broke out to the upside in June.

Silver lags gold- The ratio hits a high on the quarterly chart

The price of gold moved above its 2016 peak following the June Fed meeting and was at over $1410 per ounce as of July 12. The technical resistance level for gold was at the $1377.50 level, the high that followed on the heels of the Brexit referendum. When gold reached that peak, silver traded to a high at $21.095 per ounce. As gold moved to a new high last month, silver only made it up to $15.555 per ounce.

Source: CQG

As the quarterly chart highlights, at 93.37:1, the number of ounces of silver that it takes to purchase an ounce of gold has moved above the 1990 peak. In 1990, the high price for gold was $428, and for silver, it was at $5.445 per ounce. At over $1400 and $15, gold and silver are significantly higher than when the ratio was last at its high.

 

 

More room on the upside based on the monthly and weekly charts

While the price relationship between silver and gold moved to a new high for gold and low for silver on the quarterly chart at over 93:1, the monthly and weekly charts tell us that there could be more room on the upside for the price ratio.  

Source: CQG

The monthly chart shows that in March 1991, the ratio moved to a peak at 98.72:1.  

Source: CQG

During the week of February 19, 1991, it took 101.42 ounces of silver to buy an ounce of gold. Therefore, we could see a continuation of weakness in the price of silver compared to gold before the ratio reaches a record level.

 

GLD and SLV can replicate the ratio

It is possible that mean reversion will eventually take the ratio lower. However, price divergence can occur for prolonged periods. The two most liquid ETF products in the gold and silver markets are the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV). The products have net assets of almost $36 billion and $4.92 billion, respectively. GLD trades an average of over 7.8 million shares each day while the average the daily turnover in SLV is over 9 million shares. A long position in SLV and short position in GLD on an adjusted basis to reflect equal dollars is one way to position for a decline in the silver-gold ratio. On July 12, SLV settled at $14.26 per share with GLD at $133.50. The current ratio means that each short position in GLD would require a long position of between nine and ten shares of SLV to represent the current level of the price ratio.

If gold continues to climb, it may be just a matter of time before silver decides to catch up, and the ratio begins to decline. However, spreads in the world of commodities can contain just as much, if not more risk than outright long or short positions.

 

About the Author 

Andy Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories.  Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.  Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.


The iShares Silver Trust (SLV) was trading at $15.13 per share on Thursday afternoon, up $0.19 (+1.27%). Year-to-date, SLV has declined -5.38%, versus a 11.94% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #9 of 33 ETFs in the Precious Metals ETFs category.


This article is brought to you courtesy of ETFDailyNews.


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