Archive for the ‘Metal’ Category

GOLD SILVER RATIO………. “PLAY SAFE”

If you are concerned about deflation, devaluation, global economies downturn, currency replacement, etc. – this tool of Gold/Silver ratio (GSR) will probably make sense to you. And that’s because precious metals have a proven record of holding their value in times of economic traumas..

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Note: For calculating the ratio, divide the price of gold by the price of silver.

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IMPLICITY

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The rate effectively measures how much silver one would have to sell at any given time in order to purchase one troy ounce of gold, or alternatively, how much silver one could buy if one were to sell one troy ounce of gold. Implicitly, the higher the rate the stronger the comparative performance of gold, effectively its increased purchasing power of silver. Likewise, a lower GSR signals comparative weakness in gold (or strength in silver) and the lack of purchasing power for the yellow metal.

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The GSR also offers us an insight into how the comparative values of the two metals shift during times of recession and economic recovery. Looking at previous global recessions over the past twenty years, the GSR has rallied during the downturn and seen its apex as the global economy began to recover.

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Historically speaking, the ratio has averaged at 58.0 & during the height of the economic crisis in late 2008; the ratio peaked at its highest level in four years at 78.0. Looking at this level compared with just about every historical average, the rate was significantly overbought gold, as a flight to safety across the markets pushed the yellow metal to outstrip its industrious counterpart.

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ASSESSING THE POTENTIAL

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Analyzing the data, it’s clearly noticeable that the lower the ratio/number, the more expensive silver is, as compared to gold. Conversely the higher the ratio/number, the cheaper silver is as compared to gold. So how can we use the rate to assess potential future moves across the precious metals complex? Firstly, by definition, as the global economy recovers and broader m a r k e t s b e g i n t o stabilize, risk appetite will return back to the market. As the necessity for a safe-haven reseeds, capital will naturally begin to flow away from gold and into the higher volatility securities.

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Interestingly this is likely to also involve some of these funds moving from gold into silver, which has always been a higher beta metal; that is to say has a higher volatility and higher price elasticity than the precious metals complex as a whole.

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A rising GSR in a rising Gold and Silver Environment means that that a premium is being placed on safety / risk aversion.

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Wrap-Up

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Silver often tracks the gold price due to store of value demands, although the ratio can vary. As a final point, it is important to note that this assessment of the ratio does not necessarily imply that gold prices will fall and silver prices will climb. This may mean silver will climb at a higher rate than gold does over the coming year, or it may mean silver remains steady while gold slides back towards previous ranges. Either way, when considering if or where to invest in the precious metals complex, this traditional.

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