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.