We’ve advised going long the Gold/Silver ratio. We tried back in March but closed the trade as we felt Silver, which was at $39, was about to go parabolic. Now that Silver has put in a top, it is time to try the trade again.
Our first chart shows the ratio going back to 1981. There are a few things to note here. First, the ratio is extremely oversold as per the RSI. Second, the ratio fell from about 79 in late 1997 to 42 in 1998. The ratio immediately rebounded to 62. In the past six months the ratio fell from 70 to 31. We have a target of 45-50.
Zooming into the short term we see that the ratio basically plunged from 50 to 31. There isn’t any congestion until 45.
In a recent editorial we identified $33-$34 as a target bottom for Silver. For Gold, we see support at previous resistance of $1430-$1445. These targets would give us a Gold/Silver ratio of 42-44. This looks to be a low risk trade with decent potential in the near-term. Those with experience in options could use options to add leverage to this trade.
