maggiemoorely

02:51 AM

I know there've been other threads about this subject, but what I'm curious about is what the gold/silver ratio is doing right now from an analytical standpoint. It appears to be making a wedge, and my understanding is that typically when lines come to an intersect like this it often foreshadows a strong move to either direction. My question is, which direction seems more likely at this point?

Another thing I'm curious about what may have caused the sheer dropoff in the stochastics (blue line on bottom segment) at 2010-09? This coincides with when the ratio took off on a linear path in favor of silver for the next 8 months.

You can clearly see the change after the margin hikes in May, and the stoachastics responded by jumping to the upside in favor of gold. Even though the link points out that the stochastics are currently rising it looks the moving average (red line on bottom segment) may be in the process of making a double top similarly to the span from 2009-10 through 2010-04. However, the blue line would need to cross over the red line in order for that to reach fruition (link/image at very bottom explaining why).

My guess is that since the wedge formation portends a strong move potentially, and since the stochastics have a lot more room to move down than up, that that is the path of least resistance. If silver is to be hit harder when prices fall, then the reverse assumption is that prices should rise if the ratio moves in silver's favor. If it moves in gold's favor then we would probably be looking at lower metal prices. This will probably be more influenced by how much fiscal policy impacts "risk-on" vs. "risk-off" mentality than anything else, but I thought this was an interesting study, and may have some relevance going forward.

Info from the original link at:
http://www.thebulliondesk.com/news/?...=145194&type=1

Analysis

The ratio is holding up at a relatively high level and is holding within an ascending triangle - these tend to break to the upside.
The stochastics are also rising.
So what could a rise in the ratio mean?
We would expect the ratio to rise if the broader markets undergo a significant sell-off on risk reduction. In such a scenario, we would expect any fall in gold prices to be more cushioned than the fall in silver - as was the case in 2008.

Conclusion

A rise in the ratio is likely to coincide with falling bullion prices, albeit with silver falling at a faster pace than gold.

Stochastic assumptions taken from the following site and subsequent image:
http://www.thestreet.com/story/10407...cillators.html

07:25 AM

I know there've been other threads about this subject, but what I'm curious about is what the gold/silver ratio is doing right now from an analytical standpoint. It appears to be making a wedge, and my understanding is that typically when lines come to an intersect like this it often foreshadows a strong move to either direction.

IMO, I don't think that anything can be predicted by looking at this ratio. I recommend going back in this very forum in the April - May timeframe and look at all the wild predictions by people who believed in the silver/gold ratio. None of these predictions came true yet they were blowing large sums on silver bullion believing that it just had to catch up with the historical (but legislated) gold/silver ratio. It's all silence now as silver fell back 25% and hasn't moved much since while gold has hit new highs.

09:53 AM

My question is, which direction seems more likely at this point?

I'm not a big fan of the gold/silver ratio. Any ratio that moves between 10 and 70 is of little analytical use except at the extremes. But technical analysis is if some use. Unlike some others, I don't believe technical analysis can forecast the future. What it does is give you a tool that tells you what you can do TODAY that has a higher than 50% probability of success. In the case of the chart you posted, I don't think anything should be done until the trend breaks out in either direction. Once that happens, there is a good chance that it will continue for awhile. All of this is only my opinion and the way I look at technical analysis.

Edit: For the purists out there, according to Antal Fekete, the range for the gold/silver ratio since 1871 has been 15 to 100.
http://www.professorfekete.com/artic...Volatility.pdf

To me the gold, silver, platinum, ratio is like looking at the past number screen on a roulette table. It might make you feel like you can predict something or that the information is useful, but it is just the history and masks the fact that we are in uncharted waters in relation to metals values. JMO Matt

11:09 AM

I was actually rereading Historia Numorum last night and it was talking about gold/silver ratios. In Babylon it was 13.3/1, and this drove the systems in the eastern med for a few hundred years. Then large gold mines in Thrace were found and the ratio went down to 10/1 for most early Greek issues. The Persians were 13.3/1 until their capture of Lydia when exposure to the Greeks ratio had them lower theirs.

My point of this? The ratio always adjusts based upon geography and demand. Since its now a world market geography no longer matters, so its simply demand. All of the historical gold/silver ratios you read about are slanted in that they basically are European and middle eastern standards anyway. With demand now worldwide, and both metals having very different uses and sources of demand, I really do not see how this ratio is meaningful in any way.

Is it interesting to read about? Yeah. Is it interesting to know that the historical ratio is a pretty close approximation to the levels found in the earth? Absolutely. Will analyzing this ratio do anything to help me know what to buy or sell? Heck no. EVEN IF you believed this ratio will predict the future, which would it predict? I know those who push this stuff will always tell you one or the other HAS to go up, but if its just a ratio its just as easy for the "overvalued" PM to go down and get the ratio in line, right? So, EVEN IF the ratio today was believed, and it said that silver was relatively undervalued, what does that tell you? Buy silver or sell gold? If you do not know which of those actions would occur, the ratio would STILL be useless for investing.

Chris

Edit: Btw Inflexion I hope you are not taking these responses as picking on you in any way. I am responding generally, since many people here would read about the ratio. I know you are a silver bug, which is great, and to me it is extremely interesting how gold, by its price, is so much more valued apparently versus its true rarity. I am just cautioning everyone that this knowledge, even though true, I do not believe helps determine which metal to invest in. Even if a person believes this ratio has to change, always remember the old truism, "markets can remain irrational longer than investors can remain liquid". I simply believe that excessive demand from economically rising countires/cultures is unbalancing things. I have no idea whether this imbalance will ever be changed, so therefor simply hold both PM's.

With demand now worldwide, and both metals having very different uses and sources of demand, I really do not see how this ratio is meaningful in any way.

I agree. It is useless as an investment tool. Will it ever give a correct buy/sell signal? Yes, exactly 50% of the time, same as a coin flip. But it is popular because the ratio is pushed by a lot of the folks who write articles about PMs who have little or no economic training. They are all over the internet with it pretending that they are providing valuable "analysis."

11:34 AM

I don't feel like anybody is picking on me Click here to enlarge

I agree the chart is not telling us anything right now. I was more interested in the implications based on which direction it moves in the future, as well as what factors have caused it to move in the past.

Something changed in September of 2010 that caused the ratio to bolt in silver's direction. I can't seem to find any correlating activity, but there must be something based on the behavior. The point would be to reverse engineer the chart to identify impactual factors to the ratio and then use those factors as a means of identifying where the ratio is most likely to go based on the past, not using the chart itself for that purpose which really doesn't give any indication where it is going.

I don't feel like anybody is picking on me Click here to enlarge

I agree the chart is not telling us anything right now. I was more interested in the implications based on which direction it moves in the future, as well as what factors have caused it to move in the past.

Something changed in September of 2010 that caused the ratio to bolt in silver's direction. I can't seem to find any correlating activity, but there must be something based on the behavior. The point would be to reverse engineer the chart to identify impactual factors to the ratio and then use those factors as a means of identifying where the ratio is most likely to go based on the past, not using the chart itself for that purpose which really doesn't give any indication where it is going.

That's the holy grail, but I'm not sure it is possible. Silver is more volitile than gold, but I don't know of any factors that have a cause and effect relationship on the future ratio other than investor preference at the time. Central bank buying and selling has a big impact on gold. Industrial demand has a big impact on silver. The futures market has an effect on both. So the chart can identify the trend, but that's about all.

maggiemoorely

Thursday, September 22, 2011

Gold/Silver Ratio

Gold/Silver Ratio

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