The Gold Silver Ratio

The Gold Silver Ratio – What is it and what can it do for you?

Hi Friends-

Our pals silver and gold are trying to figure out what to do next.  It’s been quite a sprint over the last few days so a breather is definitely in order. [I wrote this prior to the last bump - gotta' keep your eye on these guys every minute!) I’ve been in the middle of an article about the Gold Silver Ratio, and it just so happens that our compatriot GE Christenson (AKA Deviant Investor) beat me to it and has written a very powerful piece about the GSR as a forecasting tool.  Before we get into his data, let’s look at the GSR.

What is the Gold Silver Ratio?

The GSR is exactly what it says it is; it is the ratio of the gold price to the silver price. It can also be defined as the number of ounces of silver it takes to purchase one ounce of gold. To find the ratio, you simply divide the current spot price of gold by the current spot price of silver and voilá - there you go.  Our pals over at Goldseek will do the math for you and even give you visual learners a chart to look at.  The ratio is, of course, is dependent on the individual gold and silver prices and can be quite volatile at times.  Notice that over the last few days it’s gone from around 64 to below 59.

gold silver ratio

So how can I use the Gold Silver Ratio to make millions?

That’s what you really want to know, right?  Well, if it was that simple… blah blah blah…  Seriously though, in order for the GSR to be a useful tool for us, we must needs know a few basic facts.  We need to know what a normal looking, average height GSR might look like. That's not as easy as it sounds.  There is so much information and conjecture on this topic that it begins to become noisy.  For a bit of clear conjecture, I’ll defer to the great Eric Sprott:

The last time money was synonymous with defined amounts of gold and silver, the ratio was set at 16-to-one. In fact, for most of the past millennium, one ounce of gold would have been convertible to somewhere between 10 and 16 ounces of silver - an amount roughly in line with the relative occurrence of each mineral within the earth’s crust. For the better part of the past century, due to the world’s abandonment of bimetallism and then the gold standard, the gold/silver ratio has fluctuated widely, twice reaching lows near the 15-to-one mark and a high of 100-to-one back in the early 1990’s. The most recent high reached in the latter part of 2009 was nearly 80-to-one. Since then the ratio has been tumbling to where it stands now at 35-to-one [in April 2011]– which reflects the incredible outperformance of silver over that time period. In our opinion, this ratio will continue to move lower, driven by nothing more than basic supply/demand fundamentals.

So, there’s a little hint for you on how you can use this Ratio.  Here’s a little more from our friends at Provident Metals:

Since 1687 – as far back as the records reach – the gold-to-silver ratio vacillated between roughly 14 and 100. Around 1900, the ratio steadied, remaining relatively flat.  Indeed, prior to 1900, the gold-to-silver ratio hovered around 16. This was likely because many countries were using gold- and silver-backed currencies. For instance, France and the United States (among others) assigned statutory limits on what the ratio could be.  Also, the U.S. Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, which could provide another explanation for the pre-1900 gold-to-silver ratio average. Throughout the twentieth century though, the gold-to-silver ratio has averaged about 47-50 and has fluctuated wildly at times.

Starting to get it?  Investors in silver and gold watch this ratio and will use it to determine where to put their not-so-real paper money. To put it simply, when the ratio is high (like now), then silver would appear to be the place to be.  When lower, then gold would be your choice.  A common technique is to exchange one metal for another when extremes of the ratio are seen, but that creates a reportable tax event (We’ll discuss silver and taxes soon.)

If the ratio were to revert to 16:1, and gold were to remain constant at around $1350, the price of silver would be around $80.  Of course, this is a highly unlikely situation as the two metals traditionally move in tandem.  If, however, we see both gold and silver rising in the future and this 16:1 was met, silver would be at a much higher price than $80.  We must keep in mind, that rather than silver rising, we could see gold falling to reach our 16:1.  We must also remember that the 16:1 ratio is hotly debated because the prices of silver and gold were pegged for so long.  There are plenty of analysts such as Ted Butler and his ally Israel Friedman who believe that the silver is less plentiful than gold, and therefore the ratio should much much low and possibly even be reversed!

Again, we’re getting noisy.  We’re beginners here and we just want to get the concepts down, we’re not trying to go all Hunt Brothers on this thing.  That said, we’ll close out with a portion DI’s analysis that will demonstrate just how we can use this tool to tell forecast where the market may be headed.  Judging from the last few days, he’s sure been right.

Silver:  The GSR Bottom Finder

 Conclusions:

 Six of eight significant silver market lows in the past 23 years occurred when the GSR (gold to silver ratio) was > 64 and the RSI (Relative Strength Index (link) of the GSR was < 35.

Silver, in late June and early July 2013, met the above criteria, along with a near record low RSI of the GSR, and a record low in the TDI Trade Signal Line.  These are strongly bullish conditions.

Previously, two other important lows occurred about 4.7 years ago, and 9.2 years ago.  Both of those lows were followed by explosive rises that took silver prices much higher.  The June/July 2013 low looks similar to the 2004 and 2008 lows.  We will see if the upcoming rally is similarly explosive or not.

October 2008:  $8.53 to nearly $50.00

May 2004:        $5.50 to about $21.00

The Analysis:

Much has been made of the gold to silver ratio.  It is currently (August 8, 2013) about 64, with gold about $1312 and silver about $20.41.  After examining the data for the GSR for the past 23 years, we find that:

  • The highest ratio was about 102 in February of 1991. (silver very low)
  • The lowest ratio was about 32 in April of 2011.  (silver quite high)
  • The average ratio (weekly closes) since 1/1/1990 has been about 65.
  • The average ratio for the past 10 years has been lower at about 58.

All significant price lows in the past 23 years occurred at (GSR) ratios greater than 64.  However, a better indicator of significant lows is the Relative Strength Index of the GSR based on 21 weekly closes combined with the GSR.

 Date

 

Silver Price

 

GSR

Low RSI
of GSR

RSI Low to
Price Low

02/19/93 3.565 92.85 51.40 RSI 1 wk after
07/18/97 4.270 77.19 26.20 RSI 1 wk after
08/31/01 4.165 66.05 19.96 RSI 2 wk after
11/23/01 4.035 67.68 29.98 RSI 2 wk earlier
10/11/02 4.320 73.43 34.90 RSI 2 wk after
05/07/04 5.600 67.70 46.81 RSI 6 wk after
10/24/08 9.290 78.57 10.76 RSI 1 wk earlier
07/05/13 18.730 64.76 4.84 RSI 4 wk after

Not all significant lows were marked by HIGH ratios and a LOW RSI of the ratio.  But, a high ratio along with a low RSI were strongly indicative that a significant price low had just passed (typical) or was due very soon.  The low in the RSI usually occurs about two weeks after the actual price low.  Think of this as confirmation of the price low.

Further:

July 05, 2013 had a silver low of $18.73 (weekly close – actual low was in June).  Silver had fallen 46% in 9 months since a temporary high of $34.57 in October of 2012.

about 4.7 year earlier:

October of 2008 marked a silver low of $9.29 (weekly close – actual low was $8.53).  Silver had fallen 55% in 7 months since a high of $20.94 in March of 2008.

about 4.5 year earlier:

May of 2004 marked a silver low of $5.60 (weekly close – actual low of $5.50).  Silver had fallen 33% in 1.5 months since a high of $8.31 in April of 2004.  The rapid price collapse (only 1.5 months) did not allow the RSI of the ratio to reach a low value.

The TDI Trade Signal Line Indicator (an overbought / oversold oscillator) made its lowest (most oversold) reading in July 2013 in the past 39 years – the entire range of my data.  Many other oscillators were also deeply oversold and similarly bullish.

The near future for silver prices is uncertain, especially with the increasing use of High Frequency Trading (HFT) and the post 2008 “managed” markets.  Perhaps the good people at JP Morgan or Goldman Sachs have another crash planned, which we will find out in due time.  But indications are that the big players (JP Morgan etc.) are more long and less short in the paper gold market than in many years, or perhaps ever.  Hence they are nicely positioned to profit from a large rise in the price of gold.  Silver seems likely to rally, shoot ahead of gold with a larger percentage increase, and thereby decrease the ratio below 40.

GE Christenson, The Deviant Investor

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So, that’s some great stuff.  Please share your comments and questions.  We all learn from everything you share.  Speaking of sharing, share this article on your favorite social medium and link to the site.  You can also sign up for email updates by clicking on that link below.  Thanks for reading!  J.

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