Image Source: Unsplash
 

The Silver/Gold ratio is oversold, but silver is not “undervalued” relative to gold based merely on price.

A common hue and cry from Team Silver Bug is that silver is extremely undervalued relative to its big brother in metallic monetary arms. It has to be, because its price is so cheap as measured in gold!

Not true. Silver’s price relative to gold is what the market and history, save for a few distinct upside explosions in silver and the Silver/Gold ratio, say it is. These dramatic upside events have largely been driven by macro considerations, not silver seeking out its true value before being pounded back down by some elaborate conspiracy.

It is unhealthy to put your unquestioning belief and your capital into such theories. All too often in financial markets (precious metals and crypto in particular) analysis is written as if for children, or at least, for biased eyeballs. Ghost stories can be entertaining and interesting reads, but they are emotional and in the markets we need to be cold, ice cold, in order to make the right decisions. For that you need indicators.

Silver is mined differently than gold, often as a by-product metal, has different supply/demand fundamentals, more industrial utility and thus, cyclical aspects, less monetary weight, and is more sensitive to cyclical inflationary macro phases than gold.

The Silver/Gold ratio and its flip side, the Gold/Silver ratio are macro indicators to me and not a whole lot more. They do indicate whether silver is strong or weak relative to gold, but “strong” and “weak” are not “overvalued” and “undervalued”. Reference the most recent article with discussion gold’s real “value”.
 

Silver/Gold Ratio: Daily Chart

Lately silver is weak relative to gold, to the tune of an oversold reading, from which the Silver/Gold ratio is attempting a bottom as it forms a pattern with RSI and MACD diverging positively.

(Click on image to enlarge)

Weekly Chart

Expanding the view, we are evaluating each week in NFTRH whether or not the sharp decline in April will precede an upside event as it did in 2020 and from what level such an event will erupt. The Silver/Gold ratio does tend to react violently to the upside after extreme downside events.

The question is whether weekly RSI became oversold enough to instigate a big upside event. Think of the ratio as a slingshot. The further it pulls back, the more velocity and distance of the snap back.

(Click on image to enlarge)

Monthly Chart

On the very big picture we can see that the Silver/Gold ratio has a habit of following up steep declines (red boxes) with strong or extended rallies. It is still in question whether the ratio has become quite oversold enough by monthly RSI. But the risk/reward situation favors silver over gold, regardless of whether the ratio has bottomed yet. Oh, and there is the fact that the ratio is bobbing around multi-decade lows.

(Click on image to enlarge)

Beyond the state of the Silver/Gold ratio, we are evaluating the implications for macro markets of a would-be upside event in the ratio. Let’s just say it would guide us to the best places to speculate and the most bang for the buck. We are well along in the process of defining those each week in NFTRH.

In keeping emotions at bay and viewing the ratio as a major market indication with a clear story to tell, I keep ghost stories out of the picture and rational stories of what the future likely holds in the picture.

The Silver/Gold ratio indicator shows risk/reward in favor of silver and thus a whole raft of markets and assets (detailing of which is beyond the scope of this article) that would benefit from silver rising stronger than gold.

More By This Author: