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.
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.