Thursday, 19 April 2018

Why the Price Spike in Silver?

The recent price rise in silver has caused a break down in the rising trend line in the gold to silver ratio.

(Click chart to enlarge)

The recent silver price rise could simply due to the gold/silver ratio reaching or nearing its historical top of 83 (green horizontal line).

In July 2017 (actually 7/7/2017), there’s spike that exceeds 83 intraday, but closed below today level of 72. So we’ve been here before. It also shows how important this gold/silver ratio = 83 level is.

(Click chart to enlarge)

In other words, historically, PM markets wouldn’t willing to pay more than 83 ounces of silver for an ounce of gold. When silver is approaching the ratio of 83, it’s saying silver is too cheap (relative to gold). 83 is a closing ATH. The best-fit or average number is closer to 82.

2 weeks ago when this ratio reached 82, silver begun its mean reversion trade, causing it to go higher.
Note that the RSI has reached oversold level, for now (see top chart). It’s therefore likely that silver would underperform gold in the short term (doesn’t mean silver can’t go up. Just goes up less than gold).

This silver mean reversion trade is easy, for those who pay attention. Clearly silver has NEVER cheaper than 82 ounces of gold, historically. When that happens, buy silver with very little downside.

Side note: Also miners are starting to outperform gold in relative term (more accurately, miners underperform gold less in relative term). Another positive development.

The last time, early 2016, when this ratio reaches its peak and reverses, we saw a rally in PM. Would this happen again? I think it probably would. But not right away. A bit more patience is required from gold bulls.

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