Monday, September 13, 2010

Silver Signals Sizzle in GSR Break

Silver Signals Sizzle in GSR Break


With the precious metals prices rising this September, there are quite a few commentators calling for the Silver price to push to new highs. A quick look at the past week on Seeking Alpha turns up not less than ten articles with the word “Silver” in the title. It behooves the investor in mining equities to closely examine what is happening and to determine the best way to take advantage of these market events

Gold Silver Ratio (GSR)

Silver is the smaller sibling of Gold in the precious metals hierarchy. One assumes that where Gold goes, Silver should automatically follow. For a fuller background on Silver, here is a 2009 article by fellow Seeking Alpha contributor “Goldcore”.

As both Silver and Gold are precious metals and they tend to move in the markets together, there is an established correlation of the Gold price to the Silver price that is known as the Gold Silver Ratio or GSR for short. For the most of recorded history, this ratio was approximately 15 to 1, and then things changed in the 20th century. The chart below shows the GSR ratio for the last 35 years.

Note that the ratio changes, responding to economic conditions around the world, but the ratio average over this time frame has now risen to roughly 55. Note also the lowest point on the chart, a GSR of about 15 is around the year 1980, when the Silver price peaked at over $50 USD per ounce, right at the time the Hunt brothers were trying to corner the Silver market. For a more complete look at this ratio, here is an installment of a series of articles on Silver in 2009 by fellow Seeking Alpha contributor Jeff Nielson.

Silver Breaks GSR Wedge

For recent history, meaning the last three years, the price action of the GSR is depicted in the chart following:

Figure 1: Gold Silver Ratio as of Sep 10 2010. Note the break below the converging wedge starting this September.

The GSR meandered along with a value of 46 to 57 in late 2007 and the first half of 2008. Then in July, 2008, the GSR started rising rapidly and culminated in a peak of 88 by mid October 2008. The reader should note that the GSR moved prior to the equity markets chaos in the fall of that year. The GSR is a leading indicator of unrest and reported a movement to the safety of Gold bullion before the stock market tanked that fall.

After the fall 2008 peak in the GSR ratio, it has been undulating up and down in a tightening range as marked in the chart above in the blue lined triangular wedge formation. Now it is not apparent in the GSR chart here, but the reader should be aware that the precious metal prices have been marching upwards since fall of 2008. The undulations in the GSR chart are merely reflecting the varying sentiments of whether Gold was more popular or not versus Silver in the last two years. The wedge shape is indicating that the ratio was stabilizing, and that both the Gold and Silver prices were moving forwards together in tandem.

Now in September of 2010, referring to the blue vertical marker on the chart above, we see something different that the GSR is signaling. The GSR graph has broken down out of the wedge pattern in the first few days of this September.

GSR Breakdown Implications

What is this leading indicator, the GSR break down telling us? Gary of NFTRH (Notes From The Rabbit Hole) fame is continuously monitoring the Gold and Silver Ratio (GSR). On September 2nd he noted that the GSR Ratio was threatening to break down. Earlier in his blog, Gary noted that this was a no-lose situation for mining equities investors.

Let me explain what is meant by this. The precious metals are rising in tandem and lockstep that is why the GSR is completing the narrowing wedge pattern. Gold is the primary safe haven metal, the safety in value that one rushes to when there is fear in the markets. Therefore, a rush to gold, such as in the fall of 2008 causes this GSR to rise to a peak versus sibling silver. However, Silver is also a safe haven metal, but with two caveats, the market for Silver is much smaller than gold, and Silver is a lot lower priced than Gold, thereby meaning more quantity is needed for a certain dollar value. Therefore in a safe haven rush, Gold is a lot more popular than Silver and the GSR peaks in favor of Gold. Should the GSR break to the top side, favoring Gold, then gold investors may profit.

Should the GSR break to the down side, as is happening right now, this is indicating a movement in the price of Silver is accelerating higher relative to the Gold price. This is good news for Silver investors. Now, what else is happening here? A movement by the Silver price accelerating higher means the Silver demand is strengthening. As Silver is the poorer cousin of Gold, this demand is not really for safety, but it is an industrial usage demand that is strengthening. If the Silver prices rise, it is an indicator that the economic activity in the world is rising and the stock markets are not treading in fear. This bodes well for the stock market in general, and also for the precious metals market in particular.

The GSR breaking to the down side is very good news for investors in Silver but even better news for investors in Silver mining equities. It is an intuitive but not well known fact that the best gains in mining equities are made when the general markets are rising. The general markets rising makes investors feel wealthier and gives investors the monies for them to move funds into riskier mining equities. For a look at equities leveraging the underlying metals price, especially junior equities, see my previous article here.


The Gold Silver Ratio has just broken to the downside this fall. This signals acceleration in the rise of Silver prices. This is also signaling an increase in industrial demand for Silver; which is also by inference indicating a robust economic outlook going forward. This GSR breakdown then is indicating that the best gains are to be made are in the junior Silver mining equities.

No comments:

Post a Comment