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Gold Silver Ratio Print
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Wednesday, 19 December 2018 18:15

Today is the Day & The Case for the Gold Silver Ratio

 

Will Christmas come early for the Donald? Will he get his demand of lower interest rates from Father Christmas Powell? Today is the day that could see a major reversal, or just the same old, same old.

A quick re-cap. The fed have made a couple of 0.25%, or 25 basis point, increases to the Fed funds interest rate this year. Signalled by the Fed, the market is fully expecting Wednesday the 19th December will bring the rate to 2.5%.

But. At his last announcement Fed chair Jerome Powell talked about rates which were just below the Neutral rate. Markets seem to have taken this to mean that today's rate increase, if it happens, will bring it to neutral, so no more rate increase will be signalled into 2019. Add in the Donald's insistence that any rate hike now is insane, we wait to see if it actually happens.

Either way, US dollar traders are in for some excitement and that just might include the precious metals and stock markets.

The case for Gold

This time last year all eyes were on BitCoin and the other 1400 or so Crypto's. These were the new Gold the hype merchants told us. Yes, the similarities were there all right. Gold has rocketed higher several times in a buyers frenzy to get in on the act. What makes it move?

Inflation and Fiat currencies losing value - at least that was the catalyst back in 1980/81. Once the US dollar was no longer backed by Gold at the start of the 1970's it could be printed, no problem. Need dollars to buy more imports, just print more. Opec tripled the oil price and this economic shock had the Fed flooding dollars into the banking system.

Inflation hit panic levels so Gold multiplied by more than 500% by 1980. The Silver bulls got in and cornered the market briefly as it went on a 1000% rocket ride. Then, Paul Volker hit the stop button with 20% interest rates.

Speculators (the Bunker-Hunt brothers, etc.,) were bankrupted and Silver was right back were it had started at $5. Fortunes made, then lost within three years.

Sounds just like BitCoin over the last year.

Panic - Shooting wars will do the trick. The two Gulf wars got things moving. Then the financial panic 0f 2007/8 and the resultant QE printing of dollars stampeded investors out of stocks into Gold and Silver through to 2011.

The decade 2002-12 saw Gold rise over 650% and Silver by 1050%

Will these panics happen again? Of course. It's built into the DNA of our financial system. Excess on the way up and the same on the way down.

The case for Gold is getting stronger. Geopolitical tension is bubbling with the US obsession with dominating Russia and China. BitCoin, the millenials alternative to the US Dollar, has been kicked into touch (for now) and inflation is found almost everywhere without much evidence of real economic growth. The classic recipe of Stagflation.

Barrick Gold is currently leading the Gold price with this potential Gartley reversal of it's long down trend.

Will the stock market take fright and collapse? The yield curve is turning ugly and there has been difficulty in selling, non investor grade corporate junk bonds. There are plenty of triggers out there that could cause the stock market to tank. If the market does tumble, that just might be the catalyst for precious metals to take off as the ages old safe haven for capital.

For an hour long discussion of what the market faces, you can view Stanley Druckenmillers take here. just the thing if you need a break from the festivities next week.

Gold:Silver

The point of the story is that, when the red button is hit, and investors pile into precious metals, Silver outperforms Gold. It's also a consideration that Central Banks could decide to confiscate Gold, less likely with Silver. Coins in both metals are readily available and should be safe from the Feds, it's a very active market.

If armageddon hits and banks limit withdrawals as they did in Cyprus, a safe deposit box full of small denomination Gold & Silver coins could become a lifeline.

The Gold:Silver ratio gives an easy way to see the relationship between the two. Right now, today, it stands at 85. That is, it costs 85 ounces of Silver to buy one of Gold.

Over the decades, the ratio has hit a high of 100, and a low of under 20, 17 to be precise in 1980. But, since 1997 it has ranged from around 45, up to 80 and back, several times. Trading ranges can be very rewarding as an arbitrage opportunity.

Over the long run, buying Gold when the ratio is at about 47, then switching into Silver at 80, would have given a nice increase in wealth. Do the reverse switch as it hit 47 again and repeat each time as it hit the opposite level and the original investment in gold will have grown significantly. The total amount of precious metal owned increases each time without any money changing hands, apart from the first purchase.

What the ratio is telling us now

When (and if) the ratio starts falling back below 80, and gold is rising, that's the time to buy Silver rather than Gold. There's more bang for your buck. Just make sure the ratio is falling back.

Beware as the ratio, at 85, still has Gold leading the move. Once a down trend is established in the ratio with a move back through 80, that's the time to take a ride on Silver. The SLV chart may be attempting to form a reversal here, but is still vulnerable to a drop below the 2016 low.

The Fed's move today, if no more rate rises are signalled, could well result in a reversal of US Dollar strength, which could be the catalyst to set of a further Gold and Silver rally.

But the opposite. Trump's wishes are ignored and Powell signals further rate rises into 2019 to 3% or more, the US Dollar will break higher and precious metals will languish. The we will just have to wait for the next trigger.

Best wishes for a very happy Christmas.

 

From the blog

Yellen - as clear as?

Markets have been on a roller coaster ride this week with New Zealand earth quakes, the latest Trump's son revelations and then it was Janet's turn today as she attempted to clarify matters US economic to Congress. If you have nothing better to do right now (for the next three hours) you can watch the Youtube video here. This statement sums up her new (lack of) clarity about interest rates:

Read more...

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