Chart Advisor: Does Silver Have an Edge?

By Kapil Mokashi, CMT, CFP

1/ Decoding the Gold to Silver Ratio – Does Silver Have an Edge?

2/ Natural Gas – Bearish Pressure to Persist

3/ S&P 500 Near Record Highs: Is the Rally Losing Steam? 

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1/

Decoding the Gold to Silver Ratio – Does Silver Have an Edge?

For precious metals investors, the gold-to-silver ratio is an important metric to consider when deciding to invest in silver compared to gold. This ratio quantifies the number of silver ounces required to match the value of a single ounce of gold. For example, if gold is priced at $1,000 per ounce and silver at $20 per ounce, the ratio stands at 50:1. Following are some of the key points on the significance of Gold to Silver ratio – 

• Market Sentiment Indicator: The gold-to-silver ratio serves as a valuable gauge of market sentiment. A high ratio often indicates a risk-averse environment where investors prefer the relative safety of gold, while a low ratio suggests a more risk-on environment where silver, being more industrial, gains favor. 
• Relative Valuation: This ratio helps investors determine the relative value of gold and silver. When the ratio is historically high, silver might be undervalued compared to gold, presenting a potential buying opportunity in silver or a selling opportunity in gold. 
• Historical Reversion: The gold-to-silver ratio has a tendency to revert to its historical mean over time. Investors and traders can use this mean reversion strategy to buy silver when the ratio is high (expecting it to fall) or buy gold when the ratio is low (expecting it to rise). 
• Economic and Inflationary Insights: The gold-to-silver ratio can also provide insights into broader economic conditions. A rising ratio often signals deflationary pressures, while a declining ratio may indicate inflationary trends, helping investors adjust their positions in precious metals accordingly. 
• The historical data in our Gold/Silver ratio chart, shows the fluctuations of the ratio over time, making it an excellent guide for when to switch between gold and silver investments. A popular rule of thumb is the “80/50″ rule, which suggests switching to silver when its value rises above 80 ounces of silver per 1 ounce of gold and switching to gold when its value drops below 50 ounces per 1 ounce. 

Present Scenario –  

Enclosed below the is the 6-month chart of Gold/Silver ratio, which shows the current ratio at 85. Historically, the ratio tends to average between 50 and 70. When the ratio is above this range, it indicates that silver is cheaper compared to gold, potentially presenting a buying opportunity for silver. Also, given that the ratio is above its historical average, traders might anticipate a potential reversion to the mean. This could mean a future decrease in the ratio, where either silver prices rise faster than gold, or gold prices fall relative to silver. 

2/

Natural Gas – Bearish Pressure to Persist 

Natural gas prices continued their southward journey as both fundamental & technical factors weighed heavily on the prices.  critical factor driving the market’s bearish trend was the growing concern over natural gas storage levels. The Energy Information Administration (EIA) reported a larger-than-expected injection of 35 billion cubic feet (Bcf) for the week ending August 16, surpassing market expectations of a 26 Bcf build. This increase exacerbated fears of a potential supply glut as the market transitions into the shoulder season. Further, forecast of milder weather conditions in key regions northeast and Midwest dampened the sentiments & consequently, the demand expectations as the summer cooling season winds down. 

Technically, gas looks poised for a further breakdown in the short-term with no plausible support levels to arrest the drop. The weekly lower Bollinger bands are coinciding with a support level of 1.70-1.60. This looks likely to be the potential target for NG in the short term. The RSI levels on daily are below 40, while on weekly are around 43 which is a bearish territory. The lower highs & lower lows Overall, the immediate outlook appears bearish, and traders would be looking to sell the commodity on any rally looking at the bigger term picture and the accompanying fundamentals. 

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S&P 500 Near Record Highs: Is the Rally Losing Steam? 

The S&P 500’s defiance in the face of recent headwinds has been impressive. The index has shrugged off everything from geopolitical tensions (Russia-Ukraine) to domestic uncertainties (US presidential elections) to stage a remarkable rally in the past month. However, as the index flirts with all-time highs, technical indicators are flashing caution, suggesting a potential turning point. 

The specter of a double top formation is the primary concern. This bearish reversal pattern, characterized by two successive peaks with a trough in between, is taking shape on the S&P 500 chart. This isn’t the only red flag. A recent bearish engulfing candle, where the trading range completely engulfs the previous day’s price action, further adds to the bearish sentiment. Additionally, a series of small-bodied candles hint at indecision among market participants. 

The recent rally might be attributed to a “buy the dip” mentality, fueled by positive economic data and a potential slowdown in Federal Reserve interest rate hikes. However, this optimism appears fully priced in at current levels. Several reports, including a recent one from Goldman Sachs, highlight that US stocks are trading at historically high valuations. This raises concerns about the reward-to-risk ratio for buyers at these lofty levels. 

A potential breakout above resistance could be a “false breakout,” attracting retail investors seeking to capitalize on the momentum. This scenario could lead to a significant pullback, trapping these late entrants. Furthermore, overbought readings on technical indicators like the Relative Strength Index (RSI) suggest the market may be ripe for a correction. 

This confluence of technical and fundamental factors suggests a period of consolidation, or a correction could be imminent for the S&P 500. While a complete reversal might not be guaranteed, investors are advised to adopt a more cautious stance. Hedging strategies and a focus on risk management become increasingly important at these critical junctures. 

The coming weeks will be crucial in determining whether the S&P 500 can conquer the double top formation or succumb to the weight of overvaluation and profit-taking. For now, a healthy dose of skepticism is warranted. 

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Originally posted 28th August 2024

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