In my February post I called for the topping of the ratio as it hit the upside of the long-term range. The idea was to short gold and buy silver simultaneously at the 79 oz level. It's gone very well, and you can see it in the following charts.
Below is the reconstruction of the February chart to refresh your memory.
Chart 1. Gold/Silver Ratio Monthly: Half Of The Range
Chart courtesy of tradingview.com
I changed the color of my old remarks to black to stress your attention to the new colored annotations. The post-idea ratio dynamics are highlighted with the orange rectangle.
Right after the post had been published the ratio rapidly moved above the 79 oz level. The move was dangerous as I recommended exiting the trade above the 86 oz level and the ratio hit the new maximum beyond the 83 oz mark. It was very close to the stop. The demand for gold in the battle against the dollar surpassed the demand for silver which was lagging behind.
Luckily, the ratio reversed the gains above the 79 level in March. The gold/silver ratio continued in the anticipated direction in the following months, reaching the half of the range mark at 64.8 oz. Another half is still ahead to get to the target. Let us see if the idea will prove its credibility at the end.
Chart 2. Gold/Silver Ratio Weekly: 2 Supports Left To Hit The Target
Chart courtesy of tradingview.com
The ratio broke down below the multi-year orange uptrend with two strong bearish candles in April. Then we saw a perfect pullback to the downside of the broken trend at the 76.5 oz mark. After that, we got a new zigzag down with a long bearish leg in June. This month we touched the 64.3 oz level, which is a half oz below the middle of the 51-78.6 range.
I put the Fibonacci retracement (black dashed lines) from the 2011 low to this year’s maximum to identify the support levels. We are just 2.5 oz from the first support at 38.2% Fibonacci level at the 63.2 oz mark. The next and the last one is the 50% level at 57 oz, which is located in the area of 2011-2012 highs and 2013 low and therefore is fortified. The target at 51 oz is slightly above the 61.8% Fibonacci retracement level confirming the strength of the level.
Now, when the idea is in the green we can avoid the risk of the loss moving the stop from the 86 oz mark to risk-free area above the pullback at 77 oz, which is below the entry zone at 79 oz mark.
I would like to share some important questions and answers about the ratio below.
What keeps the range? The main reason is that these metals are both precious and have the same rival – the US dollar.
What makes the range wide? Silver has two faces: the one is precious and the second is industrial. The industrial demand for the silver makes more than a half of the total demand, it is strong and stable. The industrial demand for gold makes tiny 8% of the total demand. Therefore gold is more vulnerable to consumer/investment sentiment than silver.
What drives the ratio down these months? First of all, the heavy drop of jewelry demand for gold in India (top demand country), China (another top buyer), Malaysia, Egypt, Turkey and Russia. The main reason for that is the double negative effect of rising gold prices and weakening against the dollar local currencies. Secondly, consumers switched to cheap silver, especially to coins and bars and in the lesser degree to jewelry products. There is a rumor that central banks can start buying silver for reserves and this would widen the deficit of silver.
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.