Potential Impact Of Current Gold Silver Ratio

February 10, 2010 – For those who are watching the gold / silver ratio, it has exceeded what is generally considered a significant level of 70:1. The ratio measures the spot price of gold against the spot price of silver; a 16:1 ratio generally favors silver and suggests gold prices need to rise, while 70:1 favors gold and suggests that silver needs to move. Being at the high end of this ratio, gold appears to be outperforming silver and investors should be careful to consider the potential impact of the gold/silver ratio and make investments based on their conclusion.

For some time, Gold has been a strong performer; after correcting from its high in early December, gold is still trading above the previous peak in mid-October. Many analysts believe that support exists for gold prices to climb to $1,350 or higher this year. Silver on the other hand, has been harder hit. At the time of the peak of gold prices in mid-October, the gold / silver ratio was near 59:1, and it was near 64.5:1 at the December high. The current ratio stands near 72:1, suggesting that either the ratio will continue to become imbalanced as it did during the financial crisis of 2008, or it will see both gold and silver prices rise, with silver outperforming gold in the process.

During the financial crisis of 2008, a ratio that had been below 50:1 early in the year became almost 100:1 as gold moved up and silver down. If silver does not recover now, the gap could again widen, especially if gold moves up on continued economic fears. Should silver begin to rally, a strong move up by silver could lower the ratio and allow it to outperform gold during the days ahead.

A common sense approach for investors would be to purchase both gold and silver while prices are correcting. Should one metal rise and the other fall, holding both could allow the investor to offset losses in one with gains in the other. Should both metal prices rise, it could create a nice profit potential. The gold / silver ratio seems to indicate a correction in the relationship between the metal prices; investors should monitor the price movements and then make purchases based on the findings. 

Shannon King

Senior Staff Writer –

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