I know there've been other threads about this subject, but what I'm curious about is what the gold/silver ratio is doing right now from an analytical standpoint. It appears to be making a wedge, and my understanding is that typically when lines come to an intersect like this it often foreshadows a strong move to either direction. My question is, which direction seems more likely at this point? Another thing I'm curious about what may have caused the sheer dropoff in the stochastics (blue line on bottom segment) at 2010-09? This coincides with when the ratio took off on a linear path in favor of silver for the next 8 months. You can clearly see the change after the margin hikes in May, and the stoachastics responded by jumping to the upside in favor of gold. Even though the link points out that the stochastics are currently rising it looks the moving average (red line on bottom segment) may be in the process of making a double top similarly to the span from 2009-10 through 2010-04. However, the blue line would need to cross over the red line in order for that to reach fruition (link/image at very bottom explaining why). My guess is that since the wedge formation portends a strong move potentially, and since the stochastics have a lot more room to move down than up, that that is the path of least resistance. If silver is to be hit harder when prices fall, then the reverse assumption is that prices should rise if the ratio moves in silver's favor. If it moves in gold's favor then we would probably be looking at lower metal prices. This will probably be more influenced by how much fiscal policy impacts "risk-on" vs. "risk-off" mentality than anything else, but I thought this was an interesting study, and may have some relevance going forward. Info from the original link at: http://www.thebulliondesk.com/news/?id=29264&v=47&lang=en&cid=145194&type=1 Stochastic assumptions taken from the following site and subsequent image: http://www.thestreet.com/story/1040...w-to-trade-off-of-stochastic-oscillators.html
IMO, I don't think that anything can be predicted by looking at this ratio. I recommend going back in this very forum in the April - May timeframe and look at all the wild predictions by people who believed in the silver/gold ratio. None of these predictions came true yet they were blowing large sums on silver bullion believing that it just had to catch up with the historical (but legislated) gold/silver ratio. It's all silence now as silver fell back 25% and hasn't moved much since while gold has hit new highs.
I'm not a big fan of the gold/silver ratio. Any ratio that moves between 10 and 70 is of little analytical use except at the extremes. But technical analysis is if some use. Unlike some others, I don't believe technical analysis can forecast the future. What it does is give you a tool that tells you what you can do TODAY that has a higher than 50% probability of success. In the case of the chart you posted, I don't think anything should be done until the trend breaks out in either direction. Once that happens, there is a good chance that it will continue for awhile. All of this is only my opinion and the way I look at technical analysis. Edit: For the purists out there, according to Antal Fekete, the range for the gold/silver ratio since 1871 has been 15 to 100. http://www.professorfekete.com/articles/AEF140YearsOfSilverVolatility.pdf
To me the gold, silver, platinum, ratio is like looking at the past number screen on a roulette table. It might make you feel like you can predict something or that the information is useful, but it is just the history and masks the fact that we are in uncharted waters in relation to metals values. JMO Matt
I was actually rereading Historia Numorum last night and it was talking about gold/silver ratios. In Babylon it was 13.3/1, and this drove the systems in the eastern med for a few hundred years. Then large gold mines in Thrace were found and the ratio went down to 10/1 for most early Greek issues. The Persians were 13.3/1 until their capture of Lydia when exposure to the Greeks ratio had them lower theirs. My point of this? The ratio always adjusts based upon geography and demand. Since its now a world market geography no longer matters, so its simply demand. All of the historical gold/silver ratios you read about are slanted in that they basically are European and middle eastern standards anyway. With demand now worldwide, and both metals having very different uses and sources of demand, I really do not see how this ratio is meaningful in any way. Is it interesting to read about? Yeah. Is it interesting to know that the historical ratio is a pretty close approximation to the levels found in the earth? Absolutely. Will analyzing this ratio do anything to help me know what to buy or sell? Heck no. EVEN IF you believed this ratio will predict the future, which would it predict? I know those who push this stuff will always tell you one or the other HAS to go up, but if its just a ratio its just as easy for the "overvalued" PM to go down and get the ratio in line, right? So, EVEN IF the ratio today was believed, and it said that silver was relatively undervalued, what does that tell you? Buy silver or sell gold? If you do not know which of those actions would occur, the ratio would STILL be useless for investing. Chris Edit: Btw Inflexion I hope you are not taking these responses as picking on you in any way. I am responding generally, since many people here would read about the ratio. I know you are a silver bug, which is great, and to me it is extremely interesting how gold, by its price, is so much more valued apparently versus its true rarity. I am just cautioning everyone that this knowledge, even though true, I do not believe helps determine which metal to invest in. Even if a person believes this ratio has to change, always remember the old truism, "markets can remain irrational longer than investors can remain liquid". I simply believe that excessive demand from economically rising countires/cultures is unbalancing things. I have no idea whether this imbalance will ever be changed, so therefor simply hold both PM's.
I agree. It is useless as an investment tool. Will it ever give a correct buy/sell signal? Yes, exactly 50% of the time, same as a coin flip. But it is popular because the ratio is pushed by a lot of the folks who write articles about PMs who have little or no economic training. They are all over the internet with it pretending that they are providing valuable "analysis."
I don't feel like anybody is picking on me I agree the chart is not telling us anything right now. I was more interested in the implications based on which direction it moves in the future, as well as what factors have caused it to move in the past. Something changed in September of 2010 that caused the ratio to bolt in silver's direction. I can't seem to find any correlating activity, but there must be something based on the behavior. The point would be to reverse engineer the chart to identify impactual factors to the ratio and then use those factors as a means of identifying where the ratio is most likely to go based on the past, not using the chart itself for that purpose which really doesn't give any indication where it is going.
That's the holy grail, but I'm not sure it is possible. Silver is more volitile than gold, but I don't know of any factors that have a cause and effect relationship on the future ratio other than investor preference at the time. Central bank buying and selling has a big impact on gold. Industrial demand has a big impact on silver. The futures market has an effect on both. So the chart can identify the trend, but that's about all.
The other, sometimes bigger, variable is human sentiment. It would be wonderful if charts would help in any bigger global moves, but I believe that is the shortcoming of charts. They can be used to micromanage purchase points, but they simply get overwhelmed and rendered meaningless by business changes. If you start getting lots of stories about how great an investment silver is, you start having more money poured into it, and prices will change regardless of what the charts say. Supports, ceilings, all of it is meaningless when overall demand or supply moves. Unfortunately investing is one of the areas in life most fraught with human emotions, both good and bad. Trying to choose your investments and not be swayed by those emotions is not an easy task, even for investors who are fully aware of this issue. Right now I think you do have priced in positive investor outlook for PM into their price. Because of that I would consider this market a little more unpredictable. To be fair, I thought the 90's were pricing in negative investor outlook on PM, so it swings both ways. To be a neutral investor outlook, I would go along with Cloud's number of around $25ish. If you accept this, (you don't have to, you can decide yourself what levels of investor psychology is in the market), it helps you I believe understand what level of risk is possible, and what the driving factors to price change would be. To me, at these prices, I think the number one mover will be investor sentiment good or bad about the economy. I think a new demand for silver coul be announced and not really move this market, since I do not think its industrial demand driving these prices. Maybe I am wrong, and if such an announcement DID shoot the price of silver up, I could then use that fact to reevaluate my own thoughts. Not trying to say I am right at all, or predict anything, just explaining a thought process. Feel free to input your owns views, but however you feel I believe thinking of these issues this way helps. Chris
On the positive side, sentiment is what makes many investment techniques work. Value investing works because investors become overly pessimistic [i.e., panic] over some current condition in the markets and drive the price of an investment below intrinsic value where it can be profitably acquired. Technical analysis [at least the trend following techniques with which I am most familiar] works because investors tend to move in herds and if an investment has been moving up, and is moving up, there is a good chance it will continue moving up -- at least for awhile. Charts help identify the prices where the probability of gain seems to outweigh the probability of loss. So sentiment can be a valuable tool if you have the correct mentality and confidence enough in your method to apply it when it isn't always comfortable to do so.
I did a little more digging on this, and it does appear to me that human sentiment is indeed the driving factor. I found this analysis of the same movement in my first post from back in April which concludes that the reason for the move is that silver is returning to monetary metal status. http://dailycapitalist.com/2011/04/20/the-goldsilver-ratio/ Also, from an article I found right when the ratio started moving in silver's favor: http://news.silverseek.com/SilverSeek/1285111344.php In a nutshell, it seems that the gold/silver ratio is indicative of precoius metal price momentum at least recently. It appears to have a direct correlation with price action since as the ratio rises the price of silver (as well as gold) typically falls.
I agree completely sir, but in order to profit from it you must be aware of it. That what I was trying to get across in my post, and when you recognize that everything you have said is both true and doable, (at least in theory).
Theory is easy. It's that darn real world that's difficult. It isn't always easy to know what to do or not do on any given Wednesday.
