The price of gold and silver rarely move at the same
rate. The reason for this outcome is that their respective demand is
fundamentally different. To put it into economic terms, the demand for gold
is inelastic, while that for silver is elastic. In other words, the demand
for silver is very sensitive to changes in its price, while in contrast, the
demand for gold is relatively insensitive to changes in its price.
The result is that in precious metal bull markets,
the price of silver typically rises faster than the price of gold, and vice
versa in precious metal bear markets. This relationship is made clear by
the following chart of the gold/silver ratio, which shows how many ounces of
silver it takes to purchase one ounce of gold.
As precious metal prices peaked in January 1980, it
took only 16.7 ounces of silver to buy one ounce of gold. Thereafter as
precious metal prices fell, the ratio began climbing. In February 1991 it
took 101.8 ounces of silver to buy one ounce of gold, at which point the
ratio reversed course. Since then the ratio has been falling, indicating that
the precious metals are in a bull market. The ratio is now 53.8, and I expect
will in the years ahead eventually fall to the January 1980 level. In other
words, silver is leading.
Since 1991 its price has been rising faster than
that of gold. Silver has risen 4.9 times compared to gold's 2.6 times.
However, for nearly a year, gold has been rising faster than silver. This
short-term uptrend in the ratio can be seen on the above chart, with the
ratio climbing and then staying above its 40-week moving average. But this
trend is about to change in favour of silver.
The ratio looks ready to fall below its 40-week
moving average and resume its major downtrend. This event would bode well for
silver, which is an outcome consistent with the following chart.
Silver continues to follow the same pattern from the
first pennant. If history continues to repeat, silver will soon exceed $20.
Importantly, silver is also looking very good in
terms of other currencies. The following charts present silver in terms of
the euro and British pound.
In summary, it looks like the short-term trend in
the gold/silver ratio will soon be in harmony with its long-term trend, with
both trends falling. This event combined with the strength silver is
displaying against various currencies could mean that a powerful rally in
silver is just around the corner.
James Turk is the founder of GoldMoney
(www.goldmoney.com) and the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).
Copyright © 2007 by James Turk. All
Published by GoldMoney
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Edited by James Turk, email@example.com
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