The gold:silver ratio - pointing to higher prices all round?

Author: Rhona O'Connell
Posted: Friday , 13 Feb 2009

LONDON - Back in biblical times gold and silver prices were at parity although by the Roman era the ratio had widened to between 15 and 16. Silver backed major currencies right the way through to the nineteenth century although as economies evolved it tended to become the norm that silver was used for intra-national payments while gold was used for international transactions. India and China were among the last countries to remove the silver backing from their currencies, which is the reason why there have been substantial government sales of the metal from these two nations in particular although these sales have dwindled somewhat over the past two years or so. It is also the primary reason why the markets are uncertain as to the level of silver stocks, private or public, that lie in countries such as these.

What has been making something of a difference recently is the rejuvenation of gold: silver ratio trading. Technical analysts have been looking favorably on silver since the start of the year and the gold: silver ratio has come increasingly onto the radar screens. Technically-driven trading of the ratio has also been important, with the ten-day and twenty-day moving averages defining the upper boundary of the ratio's path. Once the ratio had severed support at 72 this trading gained considerable traction and within two days we were at 69, en route for a test of 67, the lowest since late September, when gold was at $740 and silver at just less than $11.

This time the activity in the market brought silver up to $13 while gold was easing from $920 to just below $900 and since then gold has taken up the reins to test $950 while silver has approached $14 then retreated towards $13.40. and the ratio has settled at around 70.

Obviously the ratio, of itself, does not drive markets. It is normally a result of the inter-related moves of both gold and silver, but every now and then it does have an impact on the metals' prices - much more so on silver than on gold.

Silver's outright fundamentals do not justify prices at these levels, but for as long as the market retains its bullish stance and investors keep coming for the metal then any industrial surplus this year stands a good chance of being absorbed and when investors like the look of gold, some of them will like the look of silver even more. This metal is, however, flying almost as high as Icarus and when that ratio starts to rise, then silver speculators had better be watching very closely.

*Silver will be the metal of the year since it is undermined, is used extensively in the tech revolution and other industries and is rapidly losing it's supply across the world. Better get some for yourself!