Strategic trade
Trade view / 20 July 2016 at 12:25 GMT

Gold-silver ratio can break even lower

Managing Partner / Spotlight Group
United Kingdom

From April 4 to June 30 one could have been forgiven for believing that the path of the gold-silver ratio (GSR) (XAUXAG) was following its usual rotation inside an impulsive channel that had been in place since mid-September 2011.

In this period, the average GSR was 73.312, and the standard deviation (SD) was 3.727.
GSR Source: Spotlight Ideas

Since the end of June, the price of gold has risen 0.549%, while silver has outperformed by gaining an incredible 6.727%.

The GSR has fallen to 66.84, so the current GSR level is at 1.737 SD. That's getting close enough to two standard deviations for me to think a correction in the GSR may be close at hand.

The chart above shows that between January and June 2011 a similar decline was seen. But one must look at the magnitude. The top and bottom of the channel were marked on January 26, 2011 at 46.68 and March 20, 2011 at 40.01. The average was 43.248 and the SD was 2.880. The low point of the extension below the channel was on April 27, 2011 at 31.65; that was equal to the average less 4.03 SD. So it's not unreasonable to conceive that while expectations of a Fed rate rise this year are mounting, gold could loose some lustre for a while at least.

So I would open a small short on the GSR by buying silver and releasing some of my gold in the expectation that the GSR will decline to at least 2 SD on the range from April 4 to June 30 to target 65.85 at least.


Management and risk:

Parameters: Gold-silver ratio

Entry: Sell 66.84  at 12:24 BST (1124 GMT)

Targets: 65.85 ... 64.43 ... 62.89 ... 60.40

Stop: 73.30

Time horizon: Strategic trade

— Edited by John Acher

Non-independent investment research disclaimer applies. Read more


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