This article was originally published on Nadex.com.
Silver and gold are precious metals joined at the hip for over five thousand years. Back in 3000 BC, the first Egyptian Pharaoh Menes declared that two and one-half parts silver equals one part gold which forever linked the two metals. Silver and gold have a long history as currency or a means of exchange for people all over the world. Gold is still classified as a foreign exchange asset by central banks across the globe who hold 33,726.2 metric tons of the approximately 190,040 tons extracted from the crust of the earth in history. While the fiat currencies of today have the backing of only the full faith and credit of the nation’s that print the legal tender, for many years either gold or silver stood behind the money.
In historical terms, many people still equate gold with the bank notes and silver with the change that jingles in our pockets. I remember my grandfather called that change silver. When it comes to the value relationship between the two metals, the long-term modern day median is a far cry from where Menes set the silver-gold ratio. Since 1974, the range of the has been from around 15.50 ounces of silver value in each ounce of gold value in 1979 to 93.2 in 1990. Over the past forty-four years, the midpoint has been at around the 55 level. At times when the ratio of the price of gold divided by the price of silver dips below the median as it did in the late 70s and early 80s, and in 2011, silver has been historically expensive when compared to the yellow metal. When the ratio climbs above the median, it is historically cheap compared to the price of gold. Moves in this metric can, at times, signal a change in sentiment in the precious metals market. A rise in the ratio is often a bearish sign for precious metals while a fall can signal increasing investment and speculative demand for gold and silver.
Silver is the most speculative of the precious metals for two reasons. Silver has earned its nickname as “poor man’s gold” because each ounce costs a fraction of the price of the same quantity of gold. However, the genuine attraction of silver for many market participants has been its penchant for price volatility. Silver tends to move a lot more than gold and many other assets on a percentage basis over time.
The silver-gold ratio has recently moved lower as gold has declined to new lows in 2018, and silver has not yet moved to a new milestone on the downside this year.
As the chart of the silver-gold ratio highlights, the price relationship had been making higher lows and higher since from March 2017 through April 2018 as it moved from the 67 to the 82 level. However, over recent weeks, the ratio has declined to under the 78 level in a sign that silver is gaining back some of its luster in the eyes of market participants.
Silver has had a mind of its own since early April which means that trading silver could offer lots of opportunities given the reversal of the trend in the ratio and pattern of lower highs and lower lows since the April 3 peak.
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