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The two precious metals appear to have broken out of a downtrend that ran for six years. If so the gold/silver ratio suggests silver may have more upside potential.

This time last week we looked at the gold chart. We noted how the price appeared to have broken out of a long-term downtrend which began in the summer of 2011 just after gold made its all-time nominal high just above $1,900 per ounce in August 2011. The upside break-out came in August this year and while gold prices subsequently dipped after a sharp rally, bullish investors are quietly confident that the trend in gold prices may have finally reversed. At the end of last week gold popped back above $1,300 and if it can consolidate above here this week then there’s a fair chance that the move to the upside may build some momentum. This would be helped along should the dollar resume the downward trend that’s been in place since the beginning of the year. And that in turn would be helped along should the Federal Reserve decide against raising rates in December as currently expected. It’s worth remembering that with Core PCE showing year-on-year inflation of just 1.3% (way short of the Fed’s 2% target) and lower-than-expected CPI numbers last Friday, the Fed has an excuse to hold off from tightening. This also makes sense given that the Fed will begin reducing its balance sheet this month so may want to study investor reaction to this reduction in monetary stimulus before risking another rate hike. 

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All the fundamental background applies to the outlook for silver as well. It could be argued that silver has also broken out of the long-term downtrend which began in April 2011 when silver hit its own all-time nominal high, coming within a few cents of $50 per ounce. But silver’s downtrend isn’t as well defined as gold’s. Nevertheless, if the trend really has changed, it could be that it has the greater upside potential out of the two metals. For a start, silver has fallen over 60% from its 2011 high while gold is now around 30% lower. On top of this the gold:silver ratio (that is, the number of ounces of silver you can buy with one ounce of gold) is currently around 1:75. This is a long way above the 1:47 ratio averaged over the 20th century. So this suggests that silver is relatively cheap when compared to gold. It is still somewhat below the 5-year high of 1:85 hit back in March last year (which meant that silver was very cheap when compared to gold) but well above the 5-year low of 1:50 at the end of 2012. If precious metals are about to make further gains, then it could be that silver outperforms gold in the medium to long term. 

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Posted by David Morrison

Category: PM Bulletin


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