uploads///Gold to Silver Ratio

Is Silver Ready to Overpower Gold in the Long Term?


Apr. 21 2016, Published 7:10 a.m. ET

Pessimistic outlook

In December 2015, Federal Reserve members stated that four rate hikes would probably be needed in 2016. However, the Fed was pessimistic in March about the probability of interest rate hikes. In March, policymakers saw only two rate hikes coming in 2016. Markets are currently factoring in only one rate hike, with added uncertainty from Fed members during last week’s speeches.

In 2016, gold has gotten off to its best start since 1974, having risen approximately 17% since the beginning of the year. The bearish bets on gold options, or put options, have been selling cheap as compared to the bullish bets, or call options, since January 14.

Gold has risen about 1.6% on a trailing-five-day basis as of April 13, whereas silver has surged a whopping 6.7%. The comparative strength of silver has brought the gold-silver ratio to as low as 77.4. The ratio indicates that it takes about 77 ounces of silver to buy a single ounce of gold.

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Gold-silver ratio

The gold-silver ratio has fallen to its three-and-a-half-month low. Silver’s strong performance in comparison to gold is clearly visible in the ratio. Although the physical demand for silver is considerably low, it is likely the paper markets have boosted the metal.

The RSI (relative strength index) for the gold-silver ratio is at 34. An RSI level above 70 indicates overvaluation, whereas a level below 30 indicates undervaluation.

The fluctuations in gold prices are reflected in the iShares Silver Trust (SLV), whereas the fluctuations in gold prices are seen in the iShares Gold Trust (IAU). These two funds have risen 16.8% and 18.6%, respectively, on a year-to-date basis.

The ProShares Ultra Silver ETF (AGQ), the Direxion Daily Gold Miners Index Bull 3X ETF (NUGT), and the Direxion Daily Junior Gold Miners Index Bull 3X ETF (JNUG) have risen 33.4%, 254.8%, and 277%, respectively.

In the next part of this series, we’ll look at China’s gold industry.


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