Gold/Silver Ratio Continues Heading Downwards In 2016
The relationship between gold and silver has changed dramatically
While gold (GLD) has soared this year, silver (SLV) has skyrocketed, leading to a big move in a key measure of relative strength often used by traders.
In the beginning of 2016, an ounce of gold was worth as much as 77 ounces of silver; by the end of February, that number would rise above 83. Yet on Monday, with gold trading at $1,357 per troy ounce and silver at $20.40, the gold/silver ratio is down to 66.5.
While this is the lowest this indicator has been since September 2014, the ratio is actually still above historical norms. The average reading of the gold/silver ratio over the past 20 years is 61; over the past five years, it's about 63. This may suggest that some of the premium gold has recently enjoyed as compared to silver has evaporated.
Interestingly, the gold/silver ratio is one of those Wall Street Rorschach tests that is used to determine the direction of the equity market, but whose signal can be interpreted in opposite ways by bulls and by bears.
The currently and frequently bearish Larry McDonald, who publishes the Bear Traps Report, points out that the gold/silver ratio also dropped in 2011 before the market's late-summer dive.
"It's a sign of real speculation, and it's one of the things that we look at in terms of systemic risk and warning signs for the market," McDonald said Friday on CNBC's "Trading Nation."
Yet where McDonald sees a red light, currently and frequently bullish Oppenheimer technical analyst Ari Wald sees a green.
With help of a historical analysis going back to 1998, Wald reports that "when silver outperforms, over the next 12 months the S&P is up on average 11.5 percent; when gold outperforms, the S&P is only up 6.5 percent."
"We would view silver's outperformance as a signal that investors are embracing risk again," Wald said Friday, adding that "it confirms our view that we think the S&P 500 is setting up for new highs over the next coming months."
Indeed, silver's industrial uses mean that its performance is more closely tied to global growth, and consequently more highly correlated with stocks than gold is. This provides ammunition for Wald's view, which is predicated on trend-following, as well as for McDonald's, which is predicated on fading the crowd.
Courtesy of cnbc.com