OMG look at silver!

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Something interesting may be happening in precious metals.

As some metal watchers likely know, there’s a historic relationship between gold and silver. Right now, we could be at a turning point because the white metal is very cheap versus the yellow stuff.

The chart below uses a custom indicator to plot the ratio of gold futures against silver futures. It’s ranged from a low of about 30 in 2011 to a high of about 80 in the last couple of years. The ratio is currently dropping from the top of its long-term range, which means silver has been cheap against gold and is getting more expensive.

In and of itself, that’s noteworthy for “pairs” traders who go long and short assets against each other. But it has potentially wider interest because silver tends to be a high-volatility laggard. It gets extended when precious metals are peaking, and craters painful when sentiment is most grim. Just look at the other turns in the gold/silver ratio:

  • It hit 67 in May 2003, at the start of last decade’s bull market in commodities.
  • The ratio hit 74 in November 2008. Silver proceeded to triple in the next two years.
  • The ratio passed 81 in early 2016, followed by another bounce.
  • The retested that 81 reading in March and is once again edging lower.

Obviously these are long-term observations and not short-term trades. But look at the bigger picture of better-than-expected economic growth in China and the International Monetary Fund raising its estimate for the U.S. Copper’s (@HG) also rallying along with steelmakers and other materials stocks. Bank of America Merrill Lynch also said money is starting to flow into the commodity space. Then of course, you have the breakout in crude oil.

Bottom line: The price action in silver may be just one more positive sign flagging a bullish turn in commodities.

Gold and Silver
Gold, Silver and gold/silver ratio. Notice gains in silver after ratio peaks (circles.)
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.