A warning sign for stock markets
Indicator: the gold/silver ratio
Updated 17 May 2013
The ratio between the relative prices of gold and silver (they're both priced in US dollars). These precious metals are both seen as 'safe-haven' investments. But they also have industrial uses - silver in particular. That means its price is likely to be more volatile - the higher this moves relative to gold, the more demand it is experiencing. You can read about the ratio here.
But extreme levels in the gold/silver ratio can also coincide with turning points in equities. That’s because the ratio shows the level of silver speculation. If this becomes excessive, it can point to parallel heavy punting in other higher risk investments, like shares. So when silver hits a high compared with gold, it can mean everyone turning bullish. Then there’s only one way stocks can go - down.
What's the latest?
Earlier in 2011, the gold/silver ratio hit 32, ie, silver was at its priciest against gold since 1983. The ratio is now 61 but this is still in extended territory.
What does this mean for stock prices?
Source: Bloomberg
This shows the S&P 500 (blue) compared with the inverted gold/silver ratio (red) – ie, the higher silver is priced relative to gold, the further up the chart the red line goes.
The latest overall upswing in the gold/silver ratio is reflected in the S&P 500's impressive rally this year. Right now, the ratio is bearish on stocks.