Gold/Silver ratio rises when money gets tight. And
it's rising right now...
SOMETHING odd is happening to the
Gold/Silver Ratio, writes Adrian Ash at BullionVault.
This ratio measures the relative strength of gold vs.
silver. It simply divides the current gold price by the current silver price.
So the Gold/Silver Ratio shows how many ounces of silver
you could swap for 1 ounce of gold...if you could find someone willing to
take the other side of the trade cost-free. (You'll pay a maximum of 1.0% to
do it on Bullionvault's tariff. Cheaper than any comparable
service.)
The ratio is useful, because gold and silver prices so
often go in the same direction (73% of the time since 1968 on a daily basis.
Gold and silver have diverged 7 days running only once). But the size of
their movements over time varies wildly, as shown by the ratio.
Now, the Gold/Silver Ratio has been rising sharply over
the last 3 weeks, jumping back towards January's 6-month highs. Which doesn't
quite fit the rising gold price. Indeed, some technical analysts would say it
was "non-confirmation" of gold's rising trend.
Why? Because gold and silver prices are usually joined at
the hip. Yet silver is failing to go markedly higher as gold jumps through
what lots of technicians called "resistance" at last October's high
of $1361.
Nothing untoward. Not yet. The 21st century to date has
seen one ounce of gold equal between 50 and 70 ounces of silver in the main.
The Gold/Silver Ratio's extremes on either side have swiftly reversed. This
week's 2-month high of 65 shouldn't worry anyone beyond hedge funds trying to
play cute, shorting gold and buying silver futures or options on credit.
But look at what the ratio suggests about the broader
macro background. Because the ratio tends to fall – meaning that silver is
gaining relative value – when strong monetary inflation is boosting the
feelgood factor of the rich developed world, most obviously the United
States.
The Federal Reserve under Alan Greenspan, for instance.
(You remember him. Not as tall as his predecessor. Spoke in riddles. Saved the world. Self-promoting like
an Oscars night selfie.) His reflation campaign as the first Tech Stock
Bubble collapsed, eating the credit inflation of stockbrokers' margin, saw
the Fed slash US Dollar rates to what was then an historic low of
1.0% in 2003. That unleashed a housing bubble which coincided with a surge in
US and global equities, and a prolonged fall in the Gold/Silver Ratio.
That fall swiftly reversed alongside everything else
(except the gold price) amid the deflationary shock of Lehmans' collapse in
September 2008. Silver then regained value, relative to gold, in the
post-Lehmans world of zero rates and QE money printing.
But from the 30-year low hit on 28 April 2011...when one
ounce of gold equated to fewer than 32 ounces of silver...the Gold/Silver
Ratio has risen. So has the real rate of interest on US bonds. Despite the
promise of "whatever it takes" to save the Euro's currency union,
so has the gnawing threat of Japan-style deflation in the Eurozone. And
starting in spring 2013, so has something like monetary restraint at the US
Fed, with QE tapering finally starting in December.
So our thesis? For today at least, it's that silver rises
faster than gold when money is becoming more plentiful, and fast.
How come? Both gold and silver have long histories of
monetary use. Five thousand years and more, in fact. But it's fair to say
this use was lost to silver before the First World War, and unequivocally
since China abandoned its silver standard just ahead of WWII. Yes, gold was
cut free from the monetary system in 1971. Yes, it had already been parked in
central-bank vaults since the 1930s, just as useless to day-to-day trade as
if James Bond villain Auric Goldfinger succeeded in irradiating the giant US
reserves, as in the 1962 film. (In the 1959 book Goldfinger
wanted to steal Fort Knox's hoard.) But those central-bank holdings
remain with us today, albeit re-arranged a little between West and East.
Proving gold's long-run appeal to long-run planners and managers.
Gold has also retained its "store of value"
function for private households as well – appealing as much today to Asian
jewelry buyers lacking formal banking or investment networks as to Western
coin hoarders fearing evil days such as Y2K. Yet silver became polarized
between industrial use and financial speculation.
Gold doesn't need monetary inflation to rise in price. The
Dollar and gold have risen together so far this month, for instance. The
Japanese Yen is also rising. Again, that suggests a tightening of money
liquidity worldwide, with investors closing their loans in zero-cost Yen
after selling the "risk-friendly" assets they'd bought with that
cash.
Silver is very much an inflation play, in contrast. But
gold can attract capital even when fear of deflation grows. And those fears
are growing right now, as the Gold/Silver Ratio suggests.
The European Central Bank, says Reuters, "is ready to use non-standard tools to deliver stable
prices." That's code for QE money-creation, the first and only resort of
policymakers terrified of a deflationary spiral.
"The risk of deflation, especially in the Eurozone, definitely
exists," agrees IMF chief economist Olivier Blanchard, interviewed by Handelsblatt
in Germany. Deflation means falling prices, typically following a credit
bubble. Consumers delay spending, hurting business and tax receipts. First
because they expect prices to fall again in the future, but second because
their incomes are likely falling as well.
See Japan since 1990, or Greece and Ireland since 2009.
Besides the immediate threat of a banking system collapse, fear of such
"lost decades" is what led the US Fed and other central banks to
slash interest rates to zero...and to start printing QE money...five years
ago. And so, by extension, it was the threat of deflation which led some big-name fund
managers to buy gold...betting on monetary inflation as the top policy
response to any chance of consumer prices falling. But it was silver which
really shot higher.
Silver may well get another inflationary boom in 2014, we
guess. Thanks oddly to the threat of a silver-sapping deflation.