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What do Silver to Gold and Platinum to Gold Ratios Tell Us?

January 11, 2013, 10:26 AM

Based on the January 11th, 2013 Premium Update. Visit our archives for more gold & silver articles.

We at Sunshine Profits are deeply convinced that the bullish fundamentals for the precious metals market are still in place, and are not easily put off by recent corrections. But how to tell which asset will outperform the others when the market finally starts to rally strongly? You might have noticed that we quite often use various ratios on our charts – such a technique is called Relative Strength Analysis and helps an analyst tell which of the two assets (or group of assets) is likely to do better in the future. This may be done to compare two particular assets (such as silver:gold ratio) or two groups of assets (such as the general stock market and precious metals stocks – SPX:GDX ratio).

In this essay, we will focus on the three most important precious metals: gold, silver and platinum and will try to apply the above-mentioned technical tool to predict which one of these may bring the highest profits in the near future. It is important, however, to bear in mind that even if one finds the asset that is likely to outperform the others in the same class of assets (such as a particular metal in the precious metals sector, or a particular mining stock among gold and silver stocks) it is still a very good idea to diversify and include also other assets from the same group in your portfolio. The thing is that finding the most likely outperformer(s) helps us set the right proportions for our portfolio but diversification is insurance in case we make a mistake or an unlikely event able to thwart our plans occurs

With the above in mind, let us jump into the technical part of today’s essay – we’ll begin with gold’s long term chart (charts courtesy by http://stockcharts.com.)

Very long-term Gold price chart

We see that prices have moved above the 60-week moving average. The bottom appears to have formed at the level of the April 2012 low. An ABC zigzag correction pattern is in place now and is similar to what was seen at the beginning of 2009 and also in late 2009-2010 (and on multiple other occasions). It seems quite likely at this time that gold’s correction has completed.

That’s not a new information, but it’s worth repeating as it’s so important – gold has been correcting for about 1.5 year now, which makes one of the longest or the longest (depending on the exact definition) consolidation since the beginning of this bull market. Consolidations are necessary to cool down the optimism and shake “weak hands” out of the market. With analysts and banks lowering their gold price targets for the coming years, it seems that the “necessary sentiment damage” has already been done and that gold can now continue its upward path – in tune with its fundamental factors.

Now, let us move on to the silver market and have a look at the white metal’s long-term chart.

Very long-term Silver price chart

We see that silver’s price is above a major long-term support line, and this makes for a bullish picture overall. It is only a bit more bullish than not, however, because silver’s price is below two important moving averages, the 10-week and 50-week. If silver just moves a bit higher (above these moving averages), then it is quite likely to rally much more in the weeks which follow, and this is something that we expect to see.

Now, let us compare gold and silver to see which one’s likely to outperform the other in the weeks to come.

Very long-term silver to gold ratio chart - SILVER:GOLD

In the very long-term silver to gold ratio chart, we see that the ratio has consolidated for a few months, and, with a rising resistance line and declining support line, the situation is inconclusive. If the RSI is taken into account, however, it seems likely that a local bottom was seen recently, and a bet on silver’s outperformance in the coming weeks seems to be a good idea today.

Finally, let’s take a look at the platinum’s performance relative to gold.

Platinum to gold ratio chart - PLAT:GOLD

An important event was seen recently as the ratio broke out above the very long-term resistance line. This is visible here and it seems that a rally back to the values seen in previous years will likely be seen once again. We realize that this is a very broad target; however, if you consider the trading range during the previous 20 years, you will see that this means a significant upside from today’s values.

For over a year now (with a short exception), the ratio has held below the 1.0 level meaning that platinum was cheaper than gold. This is not something that is often seen – if you focus on the last 20 years. We expect this situation to reverse in the months ahead and are quite bullish on platinum. The long-term cyclical turning point has once again worked out very well, closely aligned with a major bottom.

Please note that platinum is currently part of our suggested precious metals portfolio (and that’s been the case for several months now).

Summing up, the bottom has likely been reached for gold and the situation remains bullish for the weeks ahead. The bullish situation in the gold market combined with the situation in the silver to gold ratio chart indicates a bullish outlook for the white metal. Another noteworthy factor is the oversold situation in the silver to gold ratio and silver having just bottomed close to its cyclical turning point. The long-term outlook is a bit more bullish than not, and our view is that long positions in silver are justified at this time. We don’t see the $1 trillion platinum coin idea coming into life, but the platinum to gold ratio suggests that the yellow metal may be outperformed in the near future.

Thank you for reading. Have a great weekend and profitable week!

Sincerely,
Przemyslaw Radomski, CFA

Feb Market Overview

Gold Market Overview

In the recent years, the Federal Reserve dropped inflationary bombs on the market and some commentators believed that the US dollar would soon evaporate. It hasn't and, in fact, the USD Index has been moving higher since 2008. Why? How is that possible given all the dollars that have been "printed" since that time? Doesn't the basic law of supply and demand work anymore? In the February 2014 Market Overview we analyze this critical issue and - as always - we discuss the implications for the gold market.

Read more in the latest Market Overview report.

Metals charts

  • Gold chart
  • Silver chart
  • Platinum chart

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