Back in August, I updated my gold/silver ratio chart with conservative bullish targets. Today I would like to share my growing concerns about the ratio's dynamics as fresh highs haven't appeared since my first post. As I've said many times before, let us not to be biased. Change the charting when the chart changes!
Chart 1. Gold/Silver Monthly: Tarnished Diamond
Chart courtesy of tradingview.com
Above is the reconstruction of the chart from the previous post about the ratio. I added several remarks in red the call-outs and also put the middle of the green channel in a dashed line. But the most important addition is the simple, classic Momentum indicator below the chart with remarks.
None of the targets have been reached so far, but we were so close, especially in August, when the ratio hit the 80 oz level. Then in September we saw a sudden drop to the 71 oz level, the ratio fell below the uptrend by 2 ounces and that was the first warning for gold bugs. The ratio has returned above the trend line and started to crawl up very slowly to it's current high around the 79 oz level.
The gold/silver ratio penetrated the green dashed middle of the channel once in December 2014 right after my first post about the ratio, but it never did it again. The last few months, it has been literally spread on the line of an uptrend and looks like the break down is imminent.
The momentum indicator shows the power of the trend. If it's above the zero line, it's an uptrend, if it's below the zero line it is a downtrend. The indicator dipped down several times, but has been rejected by the zero line so far. Another try could break down the uptrend and change the game in favor of silver.
This indicator, as well as the RSI, are good to detect divergence between the price (ratio) and the indicator. As you can see, the momentum indicator's peaks are lower from May 2012 in spite of the dramatically rising ratio, which means that the ratio is in a bearish divergence with the indicator. In my earlier posts, I told you that the divergence itself is not giving an immediate signal for a trade, but warns us to be ready for action on price triggers like trend/support/resistance breaks. That is why we should watch carefully over the safety of the trend.
I put a red dashed segment at the 69 oz level to highlight the point of no-return for a ratio collapse where the previous resistance is.
Chart 2. Gold/Silver Monthly (Close Only): Cut the Noise, Hit the Gold
Chart courtesy of tradingview.com
Clothes make the man… drawings make the chart. The gold/silver ratio is a unique instrument as it combines the closest of rivals. On this simple line chart above it all looks clearer; lines smoothly go up and down in the 51.0-78.6 oz range. I didn't take actual extreme margins, 32.5 oz on the downside and 81 on the upside, because I wanted to highlight the range bounds where the ratio reversed more often to get a higher chance.
For the last 20 years, it was a highly profitable trade with low risk to sell gold and buy silver when the ratio hit the 78.6 mark with a target within the 46-54 oz range.
So, here we are now, a historical moment repeated, the gold/silver ratio has hit the 78.6 oz mark, the current ratio level is around 79 oz.
The trading idea is as follows: sell gold, buy silver at the current levels simultaneously (the amount of dollars received from the sale of gold should be spent in full on the purchase of silver to avoid impairment risk).
In other words, for each 1 ounce of gold sold, 79 ounces of silver should be bought. The trade should be closed at least at the 86 ounce mark as it is just above the 20-year high. The target area is located at the 51 oz mark. The risk/reward ratio equals to 1:4.
Intelligent trades!
Aibek Burabayev
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Really Excellent Article on Gold and Silver and perfect analysis. Thanks for sharing and enlightening.