18 Jul

Chart in Focus: Gold–Silver Ratio Analysis

WRITTEN BY Meera Shawn

Gold versus silver

Silver is known to be more reactive to market forces than gold, as its volatility is much higher. During the last one-month period, silver has significantly deteriorated in terms of its price. Silver futures for September expiration have dropped ~6.8% on a 30-day trailing basis, while gold futures for August expiration have dropped 4.0% during the same timeframe.

Silver typically follows gold’s trend line, although it occasionally it shows its industrial traits as well. Silver is used extensively in the production of electronic items and solar panels. Because silver is much cheaper than gold and is still one of the precious metals, it is a lower-cost alternative to gold.

Chart in Focus: Gold–Silver Ratio Analysis

The funds that closely track the rise and fall in gold and silver include the iShares Gold Trust ETF (IAU) and the iShares Silver Trust ETF (SLV). While IAU has increased 5.7%, SLV has dropped 1.6%.

The gold–silver ratio

To understand the relative performance trends of gold and silver, we have to examine the gold–silver spread, also referred to as the gold–silver ratio. This spread measures the price of one ounce of gold in terms of silver.

On July 12, the gold–silver spread was 76.4. This ratio indicates that it takes almost 76 ounces of silver to buy a single ounce of gold. The spread has increased slowly over the past month. The gold–silver spread touched a peak of 85 in late 2008. The RSI (relative strength index) level of the gold–silver spread is currently 59.5.

Any rise in the ratio points to the comparative strength of gold over silver. A higher ratio indicates that it takes more ounces of silver to buy one ounce of gold. Similarly, any fall in the ratio indicates strength for silver.

Mining shares that are significantly impacted by the interplay between gold and silver, as well as the overall mining industry, include Eldorado Gold (EGO), Harmony Gold (HMY), Alacer Gold (ASR), and Hecla Mining (HL).

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