CNBC had an interesting story about precious metals and the relationship between the price of gold and silver. The “gold-silver ratio”, as one would expect compare the metals by calculating the amount of silver that can be purchased for the cost of a single ounce of gold.
Given that gold has been well over $1,300 per ounce, while silver has been rising rapidly, recently trading over $20 per ounce, the ratio has been about 66 or so.
The story notes this indicator having been as high as the low 80’s in the beginning of the year. Historically, the ratio has been about 61.
Now comes the interesting part…
As with all good financial “signals” – the gold-silver ratio can be interpreted optimistically by some, while others can take the diametrically opposite position viewing the same information. The article quotes one analyst as interpreting the change in the ratio (and the rise in silver driving it) as a sign of “real speculation” and being a “warning sign”.
A different analyst notes that this same set of facts can be used to support an argument that “investors are embracing risk again”.
Given that gold has been well over $1,300 per ounce, while silver has been rising rapidly, recently trading over $20 per ounce, the ratio has been about 66 or so.
The story notes this indicator having been as high as the low 80’s in the beginning of the year. Historically, the ratio has been about 61.
Now comes the interesting part…
As with all good financial “signals” – the gold-silver ratio can be interpreted optimistically by some, while others can take the diametrically opposite position viewing the same information. The article quotes one analyst as interpreting the change in the ratio (and the rise in silver driving it) as a sign of “real speculation” and being a “warning sign”.
A different analyst notes that this same set of facts can be used to support an argument that “investors are embracing risk again”.
To my mind, the interesting thing about these conflicting analyses is that they are fundamentally (philosophically?) the same. Both talk about the rise in silver as being indicative of market participants taking on more risk. In the bearish case, this is seen as unwarranted speculation and a sign that there is a bubble of sorts and it’s nearing the tipping (popping?) point.
The same set of facts – i.e., silver currently rising rapidly and shrinking the gold silver ratio – is used to justify the bullish case. In that situation, the willingness of investors to keep buying as prices continue to rise is evidence that market participants are taking on more risk (hmm, where have we heard that before?), but that they are doing so because they believe the markets will be headed to new highs for the remainder of 2016.
One way to interpret this is to consider the following – Silver, while considered a “precious” metal, is also an important industrial metal. As such, the price of silver responds much more dramatically to economic events. Gold, on the other hand, is almost entirely mined and traded as an investment (and of course, for jewelry).
Viewing it through this lens, one could interpret the narrowing of the gold-silver ratio as evidence of continued growth in manufacturing, and by extension, the economy as a whole.
This will be an interesting one to watch.
Thanks for stopping by.
The same set of facts – i.e., silver currently rising rapidly and shrinking the gold silver ratio – is used to justify the bullish case. In that situation, the willingness of investors to keep buying as prices continue to rise is evidence that market participants are taking on more risk (hmm, where have we heard that before?), but that they are doing so because they believe the markets will be headed to new highs for the remainder of 2016.
One way to interpret this is to consider the following – Silver, while considered a “precious” metal, is also an important industrial metal. As such, the price of silver responds much more dramatically to economic events. Gold, on the other hand, is almost entirely mined and traded as an investment (and of course, for jewelry).
Viewing it through this lens, one could interpret the narrowing of the gold-silver ratio as evidence of continued growth in manufacturing, and by extension, the economy as a whole.
This will be an interesting one to watch.
Thanks for stopping by.
