Wednesday Stock of the Week…Gold to Silver Ratio

This week I’m going to look at the gold to silver ratio as requested by Sir riscott63. The first chart we are going to look at is a long term 20 year line chart that shows shows a huge 13 year rectangle. When this ratio if falling that means silver is outperforming gold. The ratio hit a high during the big crash in 2008 where gold had been outperforming silver for the last 2 years or so. From that high in the fall of 2008, point #4,  silver went on an unprecedented run that took the ratio all the way back down to the bottom of the rectangle where it didn’t stop at the previous lows. When it  broke the bottom rail of the rectangle it confirmed the rectangle was indeed a valid pattern. That low coincided with silver hitting it’s high for this bull market at 50.

Below is a 30 year chart of the gold to silver ratio showing where silver finally bottomed out at against gold that went all the way back to the old bull market in 1980 and again in 1983.  This chart really shows its been a very long time since this ratio has been as low as it was last year. Whenever I have a rectangle pattern I always draw in a thin dashed rail at the middle point of the rectangle, Sometimes the center point of a rectangle will act as resistance or support depending on which direction the move is taking place. Even after a clear breakout, a counter trend rally can make it all the way back into the center of the rectangle where it may reverse itself again in the direction of the previous move. I believe this gold to silver ratio maybe setting up this scenario. If you put this line chart to a bar chart you will see this ratio did make it up to the center dashed blue rail where it has reversed and maybe starting to head back down again. It could very well be that this ratio may work its way lower down below 20 where I believe a ratio of 15 ounces of silver could buy one ounce of gold when its all said and down. This would be pretty close to the normal ratio that had been in place for many hundreds of years. If this is the case then the ratio is showing that silver will be the place to be invested over the coming years.

Below is the gold to silver ratio chart, that I built several years ago, comparing the ratio to the SPX. This chart shows the clear implications of how the stock markets behave when silver is outperforming gold. As silver is used both as a commodity and a precious metal it plays a double role. When the stock market is in rally mode that puts pressure on silver as a commodity because it is used in alot of different technologies. So when we see the stock market going up we generally see the gold to silver ratio falling. As you can see from the 2008 stock market crash low silver has been outperforming gold, for the most part, as the stock market started a new bull market. You can also see when the ratio bottomed during our latest correction last year, and had a little counter trend rally, the SPX formed it’s correction low. What we want to see going forward is for the ratio to keep falling and the stock markets to go higher. If the stock markets are indeed embarking on a bull market run the gold to silver ratio should fall pretty low. Maybe all the way to the historic average around 15 oz silver to 1 oz of gold. This ratio chart will give us something to watch as the bull market unfolds for the stock markets and for silver. Note how the gold to silver ratio broke the bottom support rail during silver’s near parabolic move up to 50. Now that this long term support rail has been broken it should now be easier for the ratio to break below the bottom support rail and continue lower.

I hope this answers your question on who will be leading this next leg up in the precious metals. If the gold to silver ratio keeps falling the stock markets will continue to rise and silver will outperform gold, for the most part, going forward… All the best Sir riscott63…Rambus

 

 

 

 

 

 

Model Portfolio

Its now time to take the model portfolio out of cash. We will start with the 10 stocks we like on the side bar. I will be adding more stocks as they show good chart patterns. So the model portfolio is now in affect until further notice. Been waiting for a long time to get it going. I really hope this is the start of the next impulse leg higher that will take many months to mature.

USLV Kamikaze Trade Update

USLV is a fairly new etf for silver. It is 3 X long silver which makes it a very volatile trading vehicle which can be good or bad. So far the trade has been working very well. As I showed you on the previous post for SLV this new etf seems to be tracking SLV pretty good. You can see the bullish rising wedge and the backtest this morning to the top rail. I have the price objectives for both the inverse H&S and the bullish rising wedge shown in brown. Both price objectives are very close to each other which is what I like to see. Both patterns confirming a similar price target. We are entering an area that was a congestion zone on the way down that was a bear flag. What I would like to see happen is that we reach our price targets around the 47 area and even possibly as high as 51 which is the top of the congestion zone. Then a chopping move between say 51 or where ever the high turns out to be and a low somewhere around the first resistance zone at 41 marked on the chart below. What this would do is create a right shoulder of a much bigger inverse H&S bottom. But for right now we’ll just focus on getting up to the top of the congestion zone, bear flag, made on the way down.

USLV breakout and backtest to the bullish rising wedge.

GDXJ:GDX Ratio Chart Telling a Story

I don’t know how many have noticed that the GDXJ, the junior precious metals stock index, has been holding up better than the big caps for the last month or so. This is a very positive event taking place right now. What this ratio is saying is that when money starts flowing into the more speculative small cap stocks the whole precious metals sector, as a whole, will start to benefit. You can see on the chart below the juniors started to outperform the big caps in the middle of December and have not let up yet. I believe this is a very positive situation taking place right before our very eyes. The big H&S top that was made last year is why the precious metals stocks, as a whole, have been trading so weak until the middle of December. There is time to be in the precious metals stocks and a time to let them correct. With the GDXJ:GDX ratio getting stronger that is another reason I’ve been becoming more bullish on the whole precious metals complex. Sometimes these clues don’t present themselves until the last minute but when they do its time to act. Note the positive divergence on the RSI and the MACD.

GDXJ:GDX daily line chart showing the small caps outperforming the big caps, a positive sign going forward.

Lets take a quick look at the GDXJ:GLD and see what the small caps are doing compared to gold. On the chart below it looks like the GDXJ is trying to put in a bottom to the price of gold. If this ratio really starts to rise that would be a very powerful sign. It would mean its time for the small caps to start playing catch up and start outperforming gold, which when all the stars are alined just right for the juniors, that is when the big money will be made.

GDXJ:GLD daily look showing the juniors are trying to put in a bottom to gold which would be a very positive sign.

 

Silver Update

Below is a line chart for silver that shows last 8 months of price action. There are 3 H&S patterns that stick out like a sore thumb. The first one was the bottom made back in June that led to 10 point move before the top came in and reverse the uptrend to down.  The next H&S was a consolidation pattern that formed about halfway down to our most recent lows right in the middle of the bullish falling wedge. Now we have our current H&S pattern that is  showing the bottom of the latest move down from the 44 area. You can see it has broken the neckline and the downtrend rail and is currently backtesting from above.  SLV is currently a low risk setup for a buy.  One more note of interests is the huge positive divergences that are taking place on the RSI indicator at the top of the chart and the positive divergence on the MACD at the bottom of the chart.  As we are coming off a major low there is some overhead resistance that silver needs to overcome before getting back into a full blown rally mode but it has already taken out a major downtrend rail and has broken the neckline of the inverse H&S bottom.

Silver daily line chart showing 3 H&S patterns and our recent breakout and backtest taking place, red circle on chart.

 

NEM Quick Update

Just a quick update on NEM. It broke out of an inverse H&S pattern 3 days ago and today we had a nice backtest to the neckline. This stock is showing why I’m becoming more bullish on the precious metals sectors. The big caps will lead the way on the front end of the rally.

NEM daily H&S breakout and backtest.

Precious Metals Stocks

This weekend I’m going to fine tune a list of precious metals stocks that I think will have a good move when this next upleg begins. I’m seeing signs that this might be happening now. If any of our subscribers have any stocks that you have been following for sometime and think they might be a good candidate for the list just post them at the forum and I’ll take a look at them. They can be juniors or big caps. To all a good weekend…Rambus

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