Update On The Gold Silver Ratio

I posted an article on the gold-silver ratio (GSR) back in February 2009. My closing words were that “it looks like a top was set back in late January”. By that I meant a top in the GSR, not the price of silver which clearly had suffered a large drop during the mass sell-offs of the Credit Crunch. When the GSR peaks, the price of silver tends to bottom and that clearly came to pass as silver began a run up to $50 two years later.

How has the Gold Silver Ratio (GSR) been doing recently and how does this stand up against the price action of silver over the past years? Some will use this ratio to rebalance their gold and silver holdings. A high GSR means switch from gold to silver and vice versa. I did not pay much attention to any such signal back in 2009, but it was on my mind this week as I increased the holdings in my favoured silver ETF.

Where I did find it useful back in 2009 was as a trend changeover signal and as I show you the monthly GSR chart for the last twenty years, it is evident that the GSR has been on an upward trend since April 2001. The weekly GSR with the silver price superimposed in green is shown for comparison below it.

Since I am always on the lookout for indicators which are globally or locally useful to the price of silver or gold, one leapt out at me this week past and that was the 20 month moving average of the GSR, which is the red line on the first chart.

In this case, I noted something as the last three major uptrends of the GSR peaked in November 1996, June 2003 and November 2008. When the GSR then dropped below its 20 month moving average, it confirmed the start of a major move in silver. Using the guidance of a full month’s trading range below the moving average; the new upward silver trends were subsequently confirmed in February 1997, January 2004 and September 2009.

Now as we await a new silver bull trend to commence, again we see the GSR nicely moving just above the 20-month moving average but still giving no indication that it is about to breach below the moving average. Though the required full trading range below the average will happen some months after the chronological start of the bull, its arrival will give increased confidence to everyone who is poised or already committed to the next great move in the rollercoaster story of silver.

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