I appreciate active readers of the Blog for leaving valuable comments on Gold and Silver posts. Recently, there have been a lot of thoughts shared not only about the metals itself but also about its relationship reflected in the dynamics of the Gold/Silver ratio. I think it’s time to talk about it in this post. Please feel free to enrich this piece with your valuable thoughts in the comments section.
Back in December 2014, I shared only the third post here on the Blog. The title was more appropriate for a science fiction novel as it promised the “journey to the Moon” for the Gold/Silver ratio as it was going to hit the 109 ounces. Below is that very chart from the distant 2014 to refresh the memory.
The idea was based on the “Diamond” pattern spotted on the monthly chart (blue). The target was reached more than five years later on the 16th of March this year. The total gain is equal to 109 - 72 = 37 troy ounces of silver per troy ounce of gold or 51% in five years.
Let’s see in the weekly chart below the ratio dynamics after that post.
The price indeed never dipped below the level that was established at 59 ounces on the completion of the pattern since the idea was posted in December 2014. “Diamond” (blue) reversed the ratio to the upside, and it finally reached the long-term target of 109 ounces, and even overlapped it with a huge margin as it peaked at 127 ounces.
I spotted two segments (green ab/cd) within that move up since 2011. The expanded consolidation (red) between segments was shaped from 2014 till 2016. The cd segment almost reached the 1.272 x ab segment as the market exalted on the peak when silver suddenly broke below a multi-year minimum.
The move-up has reached the minimum target, what’s next? To address this question, I searched for the answer on the very long-term chart below, let’s have a look at it.
Chart courtesy of macrotrends.net
The maximum period that I found is the current chart above, showing 105 years of Gold/Silver ratio dynamics. I spotted there a very familiar chart structure with the same AB/CD segments that we got on the previous weekly chart, but this time it’s just giant. Almost every swing of it took more than 20 years to unfold.
The AB segment was built from 1919 at 18 ounces till 1940 at 97 ounces with a size of 21 years and 79 ounces. Then the vast consolidation emerged from 1940 till 2011, reaching the low of 32 ounces. It had two legs, which took long 71 years. Just imagine, it’s an average life expectancy! It was a true roller-coaster as the ratio had been moving between 100 ounces and 16 ounces back and forth. The final stage was robust and sharp as the CD segment reached the same distance as the AB segment just in 9 years. Moreover, it overlapped the former by 3 oz. (I took close-only price as no high/low data for the first historical period).
So, we reached the minimum targets both on the weekly and the long-term chart. What is next? I prepared another chart below to try to find the answer.
There are 3 possible ways I see for the ratio from now. It answers 3 main questions. Let’s start with the obvious one.
The first question is - did we reach the top? The top guessing and bottom picking are tricky. So, that’s why I put the blue option on the chart, which shows the path for a possible consolidation ahead of a continuation to the upside within an extended move up as the CD segment could reach 1.618 or even make a double of the AB segment. The 38.2% Fibonacci retracement level (pink) at 85 oz. should provide support for the consolidation.
The red option answers the next question positively, if we topped, then should we start the reverse cycle to the downside? In that case, we could see the mirrored move in the opposite direction.
And lastly, the technical question – we saw the AB/CD segments on the weekly and a long-term chart, what if we switch to even larger time frame? The answer could be that we have a nested move up, and the 105-year chart depicted only the breakdown of an even larger AB segment. The bold green zigzag proposes another huge consolidation before the ratio will resume to the sky. The 61.8% Fibonacci retracement level (pink) at 60 ounces might limit that big consolidation.
This is the quiz without a deadline as it could take another 105 years to get the answer, but please share your votes and comments below to leave a digital footprint for future generations.
Why is gold preferred to silver? In several posts before, I showed you that gold is a central banks’ favorite, while silver is a choice of retail investors. Who does print the money and hoards the cash? The central banks and the largest commercial/investment banks/corporations. The current geopolitical situation is tense as trade wars, and territorial disputes intensify. The COVID-19 and the subsequent money printing increased the bid for gold. The multi-polar world could be around the corner. Then gold would be the only link between currency unions as we see how emerging nations aim to drop the US dollar and put their assets into gold. The growing inequality means more gold for rich as poor people can’t buy even a fraction of silver. And lastly, let’s keep it simple, nowadays it will take 100 times less space to keep gold than silver with side costs not mentioned. It’s just more comfortable to deal with the yellow metal.
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.