Why Precious Metal Spreads Matter: The Latest Performances

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Part 3
Why Precious Metal Spreads Matter: The Latest Performances PART 3 OF 6

How Silver Dragged Down the Gold-Silver Ratio

Gold-silver ratio

When analyzing the precious metals market, it’s important to take a look at the relationship between gold (IAU) and silver (SLV). Most of the time, gold and silver walk hand-in-hand. However, silver often plays a dual role of a precious metal as well as an industrial metal.

As of March 29, 2017, gold and silver have risen 8.9% and 14.2%, respectively, YTD. As silver is frequently used as an industrial metal, the equity market rebound also positively impacts this precious metal.

How Silver Dragged Down the Gold-Silver Ratio

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The beginning of 2017 also saw some market turbulence, boosting the safe-haven appeal of precious metals. The gold-silver spread was 68.5 on March 29, 2017. This spread suggests that it took almost 69 ounces of silver to buy a single ounce of gold on that date. The peak of the gold-silver spread was close to 85 ounces in late 2008.

Steadying ratio

The gold-silver spread has fallen drastically over the past year. As of March 29, 2017, its RSI (relative strength index) was 25.7. The RSI level points a probable rise in the ratio.

It’s also trading at a considerable discount to its 100-day moving average. This increase in the ratio suggests that it could take more silver ounces to buy gold. Gold and silver were trading at $1,255.3 and $18.3 per ounce on March 29.

Bull market, bear market

Notably, in a bull market for precious metals, silver usually outperforms gold, but the opposite tends to be the case in a bear market. When silver outperforms gold, the ratio falls, and when gold outperforms silver, the ratio tends to rise.

Of course, mining stocks are also affected by precious metals, especially gold and silver. Goldcorp (GG), Royal Gold (RGLD), B2Gold (BTG), and Harmony Gold (HMY) have recovered losses along with these precious metals.

Continue to the next part for a look at the gold-platinum ratio.


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