What the Gold/Silver ratio is telling us about the (late?) bull market...

jmr5djmr5d Posts: 218 Bronze ✭✭✭
edited May 2016 in About Gold
Okay, so I've been pondering on this since last night, and this morning I wrote a short blurb about my preliminary thoughts on my website, biggermove.com. But I've been thinking more about it this morning and I kind of want to get some "veteran goldbug" opinions on it :smile:.

I've been playing around with different ratio charts and last night I noticed an inverse correlation between the S&P or Dow and the gold/silver ratio, specifically between the 1990s and around 2012:

Today I also looked up some historical charts on MacroTrends.net, lined them up visually, and did a similar analysis (gray background areas indicate recessions):

And here's the same chart again showing periods of trends with positive correlations (circled) vs. periods of trends with negative correlations (lines):

Anyway, I think those charts kind of sum up what has been on my mind. Basically, I'm trying to decide if this relationship means anything in particular, and does it have any value as far as an investment tool?

It seems like perhaps what's going on is that, in times of plenty (bull markets), gold falls out of favor and silver takes prominence since it is more related to thriving industry. Then the reverse happens in lean times -- gold takes prominence in bear markets as people look for safe havens (and also perhaps there is less industrial use of silver because of the bear market).

Not sure that bull markets = more silver demand, or bear markets = less, so I'm not sure that completely adds up. Also, silver probably wouldn't have been such an industrial metal back in the early 1900s when computers and electronics weren't around, so how do we explain the relationship then?

Also, another question these charts bring up is, what do the periods of positive correlation mean? Why do those anomalies happen, and what's the common denominator? What does the current positive correlation between the markets and the gold/silver ratio tell us?

Anyway, like I said, just trying to think this through and see if there's any value there.


  • GrandpaBrianGrandpaBrian Posts: 679 Silver ✭✭✭✭
    So @jmr5d you have been busy with your charts! Very interesting. I suspect reading charts is a bit like reading tea leaves in that everybody sees things differently. What I found most revealing in your first chart was how the correlation changed from inverse to parallel after the 2008 crisis. Does this refect the effect of extreme central bank policies post-crisis?

    I suppose when we live for seven years with abnormal policies, we tend to think they are normal. People tend to forget that never before in history have we had an interest rate period like this. I like that you go back a hundred years in your work.
  • jmr5djmr5d Posts: 218 Bronze ✭✭✭
    edited May 2016

    What I found most revealing in your first chart was how the correlation changed from inverse to parallel after the 2008 crisis. Does this refect the effect of extreme central bank policies post-crisis?

    @GrandpaBrian That's kind of where my mind was drifting ... on the chart it's as if the gold owners out there are no longer buying what the central banks are selling, and they're not being lulled and sweet-talked out of their gold with the bull market this time.

    Anyway, I know all those charts kind of look crazy, but thanks for your thoughts! :smile:
  • GoldmattersGoldmatters Posts: 4,071 Admin
    @GrandpaBrian Absoultely. That Normalcy Bias takes place so quickly it would be funny if it weren't scary. How soon we forget..... Everything.

    @jmr5d From my understanding gold is one of the least correlated assets you can own. For more in this see someone with expertise. Look up Belangp on YouTube.
  • jmr5djmr5d Posts: 218 Bronze ✭✭✭
    @ArtMatters I just recently ran across BelangP ... I don't remember if it was from something you or someone else said on this forum or just happenstance ... but I binge-watched one of his playlists a few days ago :smile: . He really does have some great, thought-provoking videos.

    That seems like it would make sense that a monetary metal would be fairly uncorrelated with other goods... you want it to be as unbiased and steady throughout time and across different markets as much as possible, and gold probably checks all those boxes.
  • GoldmattersGoldmatters Posts: 4,071 Admin
    @jmr5d lol I did mention this a week or so ago so it was probably me.

    That is one of the reason gold is so special. A non correlated asset is as rare as well... Gold
  • rohanibuang61rohanibuang61 Posts: 2,379 Gold ✭✭✭✭✭
    @jmr5d Well done and informative :)
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