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Gold-Silver Ratio Out of Balance

By Korbinian KollerCommoditiesMay 07, 2020 02:21PM ET
www.investing.com/analysis/goldsilver-ratio-out-of-balance-200523979
Gold-Silver Ratio Out of Balance
By Korbinian Koller   |  May 07, 2020 02:21PM ET
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There is a great natural edge for traders in the sense that nothing stays in a state of extreme for an extended period. Therefore, when things are out of balance in the trading world it equals opportunity. The more extreme the situation, the bigger the opportunity. This is why in market crashes huge fortunes are not only lost but often gained as well. What we are referring to today is the gold-to-silver ratio. Long before we had currencies in the form of coins and notes there was already barter with precious metals. As such, the relationship of how many weight units it took in silver to purchase one weight unit in gold was established more than thousand years ago. There is an ample record about these relationships for all this time span. They literally have always between the ranges of about 10 to 20 units of silver purchasing one unit of gold. When these measurements were on their extreme points they always returned back to to their equilibrium. Now look at this:

Gold To Silver Ratio, Monthly Chart: Out Of Balance

Gold to Silver Ratio, monthly chart as of May 6th, 2020

This isn’t even close to the typical ratios we have found consistent for more than thousand years. This is way off. We find ourselves in extreme times of change and the markets are always reflective of the world's state. Market crashes are not sustainable, neither are pandemics or anything truly extreme as well. So in our humble opinion these imbalances will find a mean again in the future. When the extremely undervalued silver prices (which currently require over 110 ounces to purchase one ounce of gold) bounce back, a person who owns silver will wear a big smile.

Gold, Monthly Chart: Overbought? May Be Not

Gold in US Dollar, monthly chart as of May 6th, 2020

Looking at the monthly gold chart one could think, that one way to take advantage of this scenario is shorting gold. We are approaching a double top formation = resistance. If you think of it though, this might not be your best bet. Fundamentally, gold is getting stronger by the day since governments in unison seem to be running the printing presses in full speed. That means the underlying fiat currencies get deluded. The strength we see on a daily basis on how this precious metal is traded with its shortages on physical deliveries rather suggest an additional edge. We do not see gold as overbought just yet, so a catch up scenario is likely. Meaning, when prices of gold should rise, silver has to catch up even more.

Silver, Monthly Chart: The Other Side Of The Coin

Silver in US Dollar, monthly chart as of May 6th, 2020

If you glance at the monthly chart of silver, you see the other side of today’s principle observation. Silver on the larger time frame is trading very close to its mean (yellow line). This is its balance point and means that it has room to move; it can get out of balance. It did just that at the previous market crash in 2008. But we see today’s extreme as being far more significant than the world’s situation in 2008. That being said, we could make the bold assumption that silver could get way more out of balance than it did in 2008. We could see a true run up. 

Out of Balance

Human behavior repeats itself, and as such, historical cycles tend to repeat themselves. What is an even stronger force to rely on is natural laws. Extremes are simply not sustainable for the long term. Today’s chart book isn’t a fine precision opportunity in regards to timing, but in times of such extremes, where the future of next generations are endangered, long-term planing ahead is vital. We do not know if our children will find a world as free as we have inherited it. We do not know if fiat currencies will survive. There is no certainty that governments can guarantee our retirement. We are at the cusp of great change in many aspects. But we can do our best to combine natural laws like compound interest and today’s topic to create financial abundance for our children´s future and our retirement. Owning in parts some physical silver seems to be such an opportunity to make a prosper future a reality.

Gold-Silver Ratio Out of Balance
 

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Gold-Silver Ratio Out of Balance

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Comments (3)
Robert Flores
Robert Flores May 08, 2020 1:57AM ET
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The only real reason why we have an inbalance is the cost of transportation and storage of silver- this is the opportunity of the century -but it will take several months for silver to start to rise
Timochin Khan
Timochin Khan May 08, 2020 12:39AM ET
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Don`t forget that "Under current federal law, gold and silver bullion can be confiscated by the federal government in times of national crisis. ...President can nationalize any commodity for any reason at any time..
James Pattison
James Pattison May 07, 2020 6:30PM ET
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You forget thst silver is also used in industrial processes and if the econmy slows that portion of demand takes a hit...
travert xavier
travert xavier May 07, 2020 6:30PM ET
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Actually it's not the most hit industries : "" Today silver is invaluable to solder and brazing alloys, batteries, dentistry, glass coatings, LED chips, medicine, nuclear reactors, photography, photovoltaic (or solar) energy, RFID chips (for tracking parcels or shipments worldwide), semiconductors, touch screens, water purification, wood preservatives and many other industrial uses. Washington-based industry group the Silver Institute calls it "the indispensable metal"
Luke Lovett
Luke Lovett May 07, 2020 6:30PM ET
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What he DOES NOT forget is that industrial processes are not going away forever. The silver market is TINY. And what he DOES NOT mention is that JP Morgan and Warren Buffett are likely two of the biggest players in the silver market.
 
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