Is Gold Overvalued Compared with Silver?



Moving averages

The surge in the gold-to-silver ratio, as discussed in our previous article, suggests that gold is overvalued compared with silver. As the gold-to-silver ratio rises, the silver-to-gold ratio falls. The trading prices of gold and silver, as of February 29, 2016, were $1,234 and $14.90, respectively. Whereas gold is trading at a 9.9% premium over its 100-day moving average price of $1,122.60, silver is trading at a 1.2% premium over its 100-day moving price of $14.75.

The 100-day moving average indicator for both precious metals suggests that gold is more overvalued than silver and should revert, pushing the gold-to-silver ratio lower. Investors could go short on the gold-to-silver ratio or long on the silver-to-gold ratio.

The above chart shows that the ratio is trading at a considerable premium to its 100-day moving average. The ratio is also at a 4.5% premium over its 20-day moving average of 79.5.

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Other investments

Some insight on silver may be gained from studying the ETFs that take their prices from gold and silver. The iShares Silver Trust ETF (SLV) and the iShares Gold Trust ETF (IAU) follow the changes in silver and gold prices. These indicators have risen by 7.7% and 17.2%, respectively, since the beginning of 2016. Miners that have also gained due to the surging precious metal prices include Sibanye Gold (SBGL), First Majestic Silver (AG), and Hecla Mining (HL). These three stocks have gained a whopping 135%, 41.9%, and 37% respectively, since the beginning of 2016. The higher gains in gold than in silver may most likely be due to more bids for gold as a safe-haven asset.


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