You may be wondering why I boldly claim that a "major move" is coming for silver. For that explanation, let me direct your attention to the following chart:
If you follow me on Twitter (@goldsqueeze1) then you may remember seeing this tweet from May 18. I've been watching the GSR closely since the start of the year because there's been a significant trend shift from bullish to bearish. (Note: a bullish GSR means that gold is outperforming silver and a bearish GSR means that silver is outperforming gold.) We saw the first signs of the sea change back in April which I wrote about at the time. As is usually the case, long-term trends don't die easily. Once the uptrend was definitively broken, the GSR fought all the way back to test the underside of its previous trend. See below:
Since the backtest, the gold:silver ratio has really started to break down once again. Momentum indicators are mess, especially the MACD which is sitting at 3 year lows. The behavior of the GSR suggests that it's heading lower, perhaps significantly so, over the next year or two. Again, this doesn't mean that gold will fall and silver will rise. It just means that silver will start outperforming gold on a relative basis. If you believe that gold and silver have now entered a new cyclical bull market (as I do), then both metals should rise over time with silver posting out-sized returns.
You may be wondering why I boldly claim that a "major move" is coming for silver. For that explanation, let me direct your attention to the following chart:
This is the same weekly chart of the GSR, but taken back a few more years. The similarities are eerie. First, there was multi-year uptrend from 2008-2010 with a nearly identical slope to the uptrend from 2012-2016. Second, its MACD in 2010, just like today, was stuck on the zero line, unable to push into positive territory. And lastly, there was a definitive break of trendline support right when silver started breaking higher. Here's the silver chart with my annotations. Again, it's hard to ignore the similarities.
Will history repeat? Will it rhyme? If it comes anywhere close to what we saw in 2010-2011, then you most certainly want some exposure to silver in the coming months.
One week ago today, I posted an observation that the gold:silver ratio was threatening to break down, the implications of which were huge for the price of silver. Low and behold, it did exactly that over the following days. Here's an updated look at the GSR with additional annotations:
As you can see, for the first time since 2011, the GSR is trading below the lower channel support. In addition, both momentum indicators are showing extreme weakness further confirming the GSR breakdown. This was a very neat and tidy up-trending channel. I didn't have to play any chart games to make those support and resistance lines fit. Both the upper and lower channels were tested and re-tested for several years over, each time confirming the importance of the boundaries.
A breakdown in the GSR means that silver is going to start outperforming gold. We've seen some extremely bullish movements in silver over the past month so don't be surprised to see it cool off for a bit. In fact, I would expect the GSR to creep back up and kiss the underside of the channel - a very normal occurrence in technical analysis. Once this happens (if it happens), then silver should start to really run. The GSR doesn't tell us anything about timing or absolute movement, but it does show relative performance. As such, I'm a buyer of silver here.
After Silver ripped higher last week, the Gold:Silver Ratio (GSR) dropped dramatically to around 76:1. You can plainly see on the six year weekly chart that the GSR has been bound by very defined upward-sloping channel. It is really amazing to see the ratio has found support exactly on the trend line at least a dozen times. Remember, the longer the time frame and the more trend line touches on a graph, the more powerful that trend becomes.
As of trading this morning, the GSR is once again sitting right on support. If the existing trend continues, then expect gold to outperform silver in the coming weeks thus keeping the GSR firmly in the channel. But what if the trend doesn't continue? What if the GSR breaks below the lower bound? If that happens, then expect silver to start seriously outperforming gold. A weekly close below 74 would indicate a long-term trend change and signal that it's time to buy silver in lieu of gold. This has been a very strong trend so if and when it's broken to the downside, the price of silver is really going to move.
Last month, when gold surged higher and broke out of its 4 year down trend, the Dow-to-Gold ratio lost critical long-term support. This ratio is a very simple calculation: take the Dow Jones Industrial Average and divide it by the price of gold. Studying the behavior of this ratio can give us clues on the relative performance of precious metals to financial assets. The ratio rises when financial assets outperform gold and it falls when gold outperforms financial assets - a very simple concept.
Charting this ratio allows us to apply technical analysis to glean trend changes in investor sentiment. A rising ratio indicates that investors are in a more "risk-on" mindset and are thus buying stocks in lieu of gold. That's exactly what's been happening for the last 4.5 years, at least up until last month.
I've plotted the DJIA:Gold ratio above on a monthly basis going back 15 years. The nice steady uptrend from mid-2011 was decisively violated to the downside in February. The recent rally in stocks has driven the ratio back up to the underside of that trend line. This is normal in technical analysis and comes as no surprise. What happens next is very important. If the ratio stalls out at the underside of the trend line (what previously acted as support) and then starts falling, then we have confirmation of a long term sentiment change by investors. Their preference has shifted from owning stocks to owning precious metals. The next month or two will be critical to confirming if indeed that shift has taken place.
Let's assume for argument's sake that the ratio has entered a new long term leg lower. What can we expect? On a relative basis, that would mean gold will outperform equities over the next several years. It doesn't tell us anything about absolute performance however. The DJIA could climb 50% over the next five years but as long as gold climbs more than 50% over the same time period, then the ratio will fall. The opposite is true as well. The DJIA could fall 50% over the next five years, but as long as gold falls less, the ratio will rise. In either situation, gold is outperforming equities.
As you can see from the 35 year chart above, the DJIA:Gold ratio was as low as 1.0 in 1979-1980 (yes, if you can believe it, both were around 850 at that time) and as high as 44 during the internet bubble. Since the year 2000, the ratio has been in a secular down trend punctuated by counter trend rallies, most recently from 2011-2015. If this counter trend rally has officially run its course, then where can we expect the ratio to go?
The first area of major support that I'm seeing is around 8. There's a lot of congestion on the chart in this area from 2009-2013. While that's only four points lower from today's level, percentage-wise, it's a 40% move. Assuming the Dow stays at it's current level of 17,000 (to use a round number), that implies a gold price of $2,125, almost 70% higher than it's trading today.
Now let's go even farther back in time and look at the 100 year DJIA:Gold ratio courtesy of MacroTrends.net:
So based on this chart, you can see that the current level of 13.5, which is miles below where it was in 2000, is still quite elevated when viewed on a long term basis. In fact, just to get back the historical median, this ratio would, coincidentally, have to fall to around 8.0 (7.7 to be exact). Funny how that works, isn't it?
Going a step further, I would argue that the DJIA:Gold ratio finds natural secular lows between 1.0 and 2.0. (It happened in 1933 and again in 1980). After exploding to a 100-year high of 44 during the dot-com mania, it sure seems like a correction back to historical lows would make sense. The two previous highs, 1929 and 1966, were followed by extreme drops. Why shouldn't we expect the same after the ratio set an all-time high in 2000?
Let's say the down trend continues and it ultimately hits a low of 2.0. Again, assuming the Dow remains unchanged at 17,000, then gold would be trading at $8,500/oz. If the Dow drops to 10,000 then gold would be trading at $5,000 oz. If the Dow rises to 25,000, then gold would be trading at $12,500/oz.
In all of these scenarios, (and keep in mind I didn't even assume a 1:1 ratio), the Dow:Gold is suggesting major upside for the yellow metal.
I'd love to hear your thoughts on this - please chime in with comments. Thanks as always for reading and remember you can follow me on twitter @goldsqueeze1.
I guess the title of this post is fairly self-explanatory...but let me elaborate a bit further. Today I'm showing the monthly chart of the Gold-Silver ratio going back to the year 2000. Remember, the Gold-Silver Ratio (GSR) is nothing more than the price of gold divided by the price of silver. It's a relative measure of value between the two metals. The higher the ratio goes, the more gold is valued by investors compared to silver and vice versa. Tracking the ratio over time gives us a good yardstick for identifying times when silver is "cheap" or gold is "expensive," etc.
So the chart above gives us a 15 year perspective on the GSR. As you can see, the natural high over this time period is around 80. There were a couple brief moments when it spiked meaningfully higher, but those instances were fleeting and quickly corrected. On the other side of the coin, you can see the natural low has been somewhere near 45, with the obvious spike lower in early 2011. Now, what does this mean in context of today's reading of 72.6?
My first observation is that the GSR just recently (last month) reached its natural high for the first time since late 2008. That's clue #1 that the ratio is running into some serious resistance. Secondly, the very slow-moving monthly MACD has just made a bearish cross. This has only happened two other times since 2000, both of which marked long-term tops in the GSR. I see no reason why this time would be any different, so clue #2 is that the momentum indicators are flashing some major warning signals.
That said, the GSR remains in the rising channel noted by the green lines. It's had multiple tests of both the upper and lower bounds over the last several years so it has to be respected. Until the GSR breaks below the lower green line, the long-term uptrend remains intact. Given the two clues noted above, however, I suspect that will happen sooner rather than later.
Earlier I stated that the natural high and low over the last 15 years was around 80 and 45, respectively. So IF the GSR breaks below that channel, then I think it has a real shot at falling all the way down to 45. This would mean that silver is going to outperform gold for quite some time (remember, this is a long-term chart with each bar representing a month of trading). It could mean, of course, that silver simply falls less than gold, but I believe that both metals will rise with silver outperforming.
Everything above was written with respect to the GSR since 2000, but what if we go back further, say 100 years? I think you will agree that the picture changes dramatically. What we have here is exactly that - a chart of the GSR going back to 1915 (this chart is a couple years old so it doesn't show the more recent spike to 80).
You can clearly see that the very long-term natural high is right around 100 and the very long-term natural low is near 15. Based on this chart, you can argue that the GSR is in a cyclical bear market and the recent ascent to 80 is nothing more than an intermediate bull run within a much larger down-cycle. In order to reach the very long-term natural low, the GSR would need to fall close to 80% from current levels. What this means in more tangible terms is that silver needs to see an epic rise in value relative to gold in order to achieve a GSR of 15.
Here's an example to help illustrate my point. Today, gold is roughly $1140/oz and silver is roughly $15.85 giving us a GSR of 71.9. Let's say gold doesn't move in price - it stays right at $1140. In order to get the GSR to its natural low of 15, silver would need to increase to $76/oz(!), or almost 5 times its current price. Going one step further, let's say gold rises back to its 2011 high of $1900/oz. That would mean silver needs to rise 700% to $126. Impossible? It's happened before so why not again?
As a corollary to yesterday's post, "Silver Clings to Support," I wanted to show how the Gold:Silver ratio (GSR) is reflecting gold and silver's immense support at $1150 and $15.50, respectively. As you know, the GSR is nothing more than the price of gold divided by the price of silver. It's a measure of relative value - as the GSR rises, silver becomes cheap relative to gold and vice versa. It's simply a different way of expressing the prices of each metal.
For whatever reason, $1150 in gold and $15.50 in silver are hard lines in the sand. No matter how many times and how high the volume, the respective prices just won't stay below these levels. As a result, we have a very tradeable range established in the GSR. The daily chart above shows the action since last December to be fairly predictable. There's firm resistance at 78 and firm support at 69. When silver got slapped down to the mid-$14s a few days ago, gold held firm around $1150. As a result, the GSR spiked to 78 but promptly reversed course in the days following. So what you ask?
Well, for the trader, ranges like this one are wonderful. You sell gold and buy silver when the GSR hits 78 and you buy gold and sell silver when the GSR gets near 69. And you keep doing this until it doesn't work. The nice thing about a well-defined range is that you have very precise stop-loss points which limits your risk.
For the longer-term investor, a range like this gives you nice entry points to buy metal. When the GSR hits 78, it's time to buy silver and when the GSR hits 69 you buy gold.
Everything noted above is based on a daily trading range spanning approximately 8 months. Zooming out allows us to see the bigger picture. Here is a monthly chart of the GSR that shows the spike up in late 2008 as gold and silver crashed in sympathy with the markets and then the spike down when silver (and to a lesser extent gold) exploded higher in 2011. Since the ultimate low of about 30, the GSR has nearly worked its way back to the financial crisis highs.
I've annotated a couple of trading ranges I'm seeing on the long-term chart. First, the blue lines show the upward channel that has been in place since late 2011. For the last 4+ years, the GSR has consistently reversed lower when it reached the upper bound and reversed higher when it reached the lower bound. It doesn't really matter why it's happening, just that it is happening.
Within the blue channel, I'm seeing a smaller consolidation pattern taking form. Since last November, the GSR has been making a lower highs and higher lows on a monthly closing basis which manifests itself as a wedge pattern on the chart. Wedge patterns act like coiled springs - once the pattern completes, there's usually a sharp burst is one direction or the other. So if this plays out like I suspect, then the green wedge will complete sometime in September or October at which point the GSR will spike higher to 90 (upper blue line) or lower into the 60s (lower blue line).
Whether you're a trader or an investor, you can use the GSR to your advantage to identify low-risk entry and exit points with the precious metals.
I'll show you the charts and you can decide for yourself. If true, then silver will start outperforming gold on a long-term basis for the first time since early 2011. At the risk of drawing with crayons, the gold:silver ratio is simply the gold price divided by the silver price. When the GSR is rising, then gold is outperforming silver. When the GSR is falling, then silver is outperforming gold. While the GSR says nothing about the direction of prices (ie. gold can fall "less fast" than silver thereby producing a rising GSR with both commodities falling in price), I'm going to argue that this chart, taken with a couple fundamental arguments, suggests higher silver prices to come over the next several years.
First I'll comment on the chart you see above. This is a monthly look at the gold:silver ratio going back 10 years so you can how it behaved at major market turning points. The GSR has settled into a fairly clean channel since late 2011, always bouncing off the lower support and reversing once it reaches upper resistance. Using the last three years as a guide, it's highly likely that the GSR will continue making its way lower until it reaches support in the mid-to-upper 60s. Today it's around 72 so we're talking about an 8-10% drop from current levels.
That's all fine and dandy, but it's not the reason for today's post. What I really wanted to show is how momentum is deteriorating to the point that we might soon experience the first major MACD cross since 2011. I've circled each instance in the last 10 years where the GSR MACD made a cross - either positive or negative. Each time this happened, it marked the beginning of a new long-term trend as each subsequent move lasted at least two years.
If and when it does cross to the downside, then the odds favor silver to outperform gold, dragging the GSR down from current levels. How low might it go?
Here's the exact same chart, this time extending back all the way to 1980. From this 35-year vantage point, you can see that the GSR spends the lion's share of its time between 45 and 80. Yes, there were periods when it was above or below this range, but I'm not looking for the exception as I'm more interested in the "most likely" scenario. With this in mind, it sure looks like the current rally has run its course as the GSR has now bumped its head on the upper bound of the 35 year channel. Given the weakness exhibited by the MACD and the fact that RSI is rolling over in unison, I believe the GSR is now on its way to 45...and I believe a rising silver price will be the reason.
Why do I think this? Because from a fundamental standpoint, silver has been trading below the cost of production for almost a year now. Steve St. Angelo of the SRSrocco Report, put out a nice report a few weeks ago detailing the primary silver miner's cumulative operating results for the year ended 2014. Not surprisingly, the group of 12 miners he analyzed reported a combined net loss of $1.95 billion for the year. That equates to a break-even per ounce silver price of $19.24 Their break-even in 2013 was $24.05/oz so you can see just how aggressively silver miners have been cutting costs to keep up with the drop in silver.
Today, silver is trading in the low $16.00s, a full 15% below their 2014 break-even level. How much longer can this go on before silver miners start shutting down thus removing supply from the market?
To address those of you who argue that more than half of worldwide silver supply comes from base metal mining, I'd like to present the following chart of DBC, the commodities tracking fund:
Do you think base metal miners will be increasing or decreasing production in the face of a 35% collapse in prices? They're going to be scrambling to cut costs and shut down unprofitable mines in order to stay in front of prices. This will only remove additional silver from the market.
Given the technical and fundamental reasons laid out above, I believe the GSR will shortly begin a prolonged descent, driven by an increase in silver prices that far outpace any increases in the price of gold.
The day after the epic OPEC decision, gold and silver got hammered in sympathy with crude oil. And silver, for whatever reason, got even more hammered than gold. Then, the following Sunday, news broke that Brevan Howard Asset Management, a hedge-fund that oversees $37 billion, will be liquidating its $630 million commodity hedge fund. In a knee-jerk reaction, gold and silver dumped more than 5% that night after already experiencing a sharp sell-off few days prior.
As a result of silver's relative underperformance, the Gold:Silver ratio (GSR) spiked to just under 78x, the highest it's been since December 2008. This is worth noting because the GSR is reaching levels that are historically associated with major tops.
The chart above is a 15 year weekly chart that shows we have been in a well-defined upward channel since 2012. This means that gold has been steadily outperforming silver during that period of time. It doesn't mean gold has been rising faster than silver, it means that gold has fallen less quickly than silver.
The spike to 78x last week effectively hit the top of the channel which has acted as resistance for the past three years. The GSR immediately reversed on Monday with the sharp rally in precious metals, punctuated by silver's outperformance. Based on GSR's behavior since 2012, I believe that it will continue to trade within the bounds of the channel, slowly working its way towards the lower support line. Using previous trajectories as a guide, I've roughed out what I believe is the most likely path over the next few months. It looks like the GSR will hit 65x sometime in early 2015. This means that between silver and gold, silver will be the relative out-performer. Again, that could mean silver will rise faster than gold over this period, OR silver will just fall less.
If my prediction is correct that the GSR will re-test the lower boundary, then we need to pay close attention to how it reacts after that point. One of two things can happen. First, it could continue its pattern within the channel which would mean a reversal higher and therefore relative outperformance by gold until the GSR reaches the upper bound again. The second, and more intriguing option in my opinion, is that the GSR breaks down below the lower bound and establishes a new downtrend. Remember, this ratio has been above 78x for only two periods of time over the last 15 years - once in 2003 and again in 2008. After each period, the GSR moved into prolonged downtrends, each lasting several years, where silver was the preferred investment between the two commodities. I believe we are about to enter the next leg down at least in the short term and quite possibly for much longer.
For all of the recent weakness across the commodities complex, including precious metals, gold has hung in there pretty well. After putting in an intermediate low of $1,180/oz in June 2013 (not shown above), it was touched again in December of the same year. After each test of this level, gold rallied sharply in the following weeks. Even as it has gone straight down since July, it's still well above $1,180. In fact, its MACD and RSI have both turned the corner suggesting near term strength - if nothing more than to work off oversold levels. Yesterday's action was also encouraging in that gold put in a nice hammer pattern, meaning that it closed near the top of its daily trading range after early weakness. This suggests buyers are stepping in at these low levels. For now, it's a game of wait and see as price remains mired in a 2 year trading range.
Silver, on the other hand, has shown extreme weakness since July. Unfortunately for the bulls, it recently broke below its $18.17 low from July 2013 and has continued falling since. This was an obvious technical level of support that no doubt many traders had used as a stop loss level. I would look for continued weakness here, possibly down into the $15s. We will likely see a relief rally back up to that green line of resistance (formerly support) before falling again. This would be to work off the extreme oversold condition in relative strength (top panel). Look for a close above $18.17 before any longer-term rallies can be considered.
Lastly, I wanted to take a quick look at the Gold-Silver Ratio (GSR) since silver has been so weak relative to gold lately. When silver broke down last Friday without a corresponding move in gold, the GSR spiked to multi-year highs. Today, we're sitting a hair below 70, the highest level since 2010. From purely a technical standpoint, this chart is incredibly bullish. After peaking in mid-2013, the GSR consolidated sideways for over a year, and now it has demonstrably broken up and out of the consolidation range. It appears that this chart wants to go higher which means one of two things. If gold continues to fall, silver will fall faster OR if gold begins to rise, silver will either rise slower or continue to fall. Either way, this chart suggests silver will underperform gold for the near future. One argument against this, however, is that the GSR RSI is so extremely overbought. In any event, we've seen a bullish breakout in the GSR which further confirms that silver knife-catching is ill-advised at the moment.
The chart above shows the gold-silver ratio (GSR) for the last 100-years. The chart looks goofy from 1915 to about 1970 because the US had the price of gold fixed for long periods of time. Then, once gold was allowed to trade freely, the GSR started to look like a normal price chart. Anyway...