By my Feb. 27, 2012 commentary, Silver to Gold, “Whither Thou Goest…”, silver price was steadily marching higher with gold and the closely watched gold-to-silver ratio (GSR) was very stable and near historical norms. Then a very bad Leap Day for precious metals together with several tough mid-March downturns produced high-low spreads of an alarming $165 per ounce for gold and $6.50 per ounce for the white metal. By this Friday’s close COMEX gold settled at $1,662.40 per ounce and COMEX silver at $32.272 - both recovering some but nowhere near the heady prices of late-February.

Through all this carnage, it is encouraging to discover that the GSR remains very stable and near historical norms. This fact reveals much about the recent sell-off and what may lay ahead for gold and silver prices. Figure 1 is an updated 6-month chart of the GSR from September, 2011 to last Friday’s close, March 23, 2012.

*Ratio of most active COMEX contract prices

Figure 1 – 3-Month Gold-to-Silver Ratio

Point A indicates the data point of my previous February commentary. The bullish compression of the late-2011 GSR (gray triangles) to present levels (yellow diamonds) continues with the 3-month moving average (gray line) moving ever closer to the ratio norm of 51 (dotted line) - a falling ratio denotes silver gaining price strength relative to gold. This analysis uses Nov. 26, 2010 to define the norm because that date marked a period when not only gold-to-silver but gold-to-copper and –oil ratios returned to stable near historical averages after the extreme volatility of the 2008-2009 financial crisis.

Although the GSR has been trending up on a day-to-day basis from a Feb. 29 low of 48.25, it closed Friday at 51.51; still a significant 10% compression from the bearish 57.23 at the close of last year. Importantly, the low ratio on Feb.29 underlines the relative strength of silver this year on a day when the yellow metal shed $100 per ounce an intraday basis.

My last commentary introduced Commodity Ratio Stability© (CRS©) as another important metric for gauging silver performance. CRS is a simple technique for assessing the stability of commodity ratios and future trends. For any commodity pair, CRS is defined as the standard deviation of their ratio divided by the ratio mean over a specified period of time – a measure of how much variation there is compared to the average. Figure 2 shows a map of the year-to-date 3-month versus 1-month gold-to-silver CRS from the last market day of 2011 to the present:


Figure 2 – 2012 Gold-to-Silver Ratio Stability Map

CRS variations (gray line) of less than 3% are considered “very stable”; if the 1-month CRS is below this level (dark gray line & arrow), the gold-to-silver ratio is considered very stable on a short-term basis. Similarly, a 3-month CRS less than 3% demonstrates excellent mid-term stability (purple line & arrow). Bearish divergence occurs when the CRS moves significantly above 4%. During some of the most volatile periods for gold and silver prices in 2011 the CRS exceeded 9% on a one and three month basis (e.g., Oct. 4 S&P 500 low for 2011; 1-month CRS 9.53% and 3-month, 9.25%).

Given that perspective, Figure 2 shows a relatively calm year so far with the CRS trajectory presently tightly circling about the “normal” point defined for November 26, 2010 (large gray arrow encircling the red triangle) giving up only a small measure of stability from the Feb. 27 commentary (point A).

The CRS map not only shows short-term and mid-term stability of the gold-to-silver ratio but also trajectory direction. Presently, the trajectory suggests an improving 3-month CRS with a 1-month variation of only 1.7-1.8%. Both the GSR and its stability are very close to the November 2010 numbers which presaged a bullish, albeit brief, period for the entire metal complex going into 2011.


Precious and base metals are undergoing a major but relatively stable re-pricing exercise given an emerging change in global outlook: better-than expected U.S. recovery, lower-than-expected Chinese demand for raw materials and a Europe that has stabilized but moves forward with serious challenges. Gold and silver may continue to be under pressure in the near-term but their long-term fundamentals are intact. The gold-to-silver ratio remains stable and near historic norms even after the price churn of the last several weeks. Improving industrial demand for silver gives the white metal additional price support – all bullish signs for the white metal going forward.

Let’s hope a geopolitical shock doesn’t turn “situation normal” to SNAFU in the coming months.

By Richard Baker, CP Value Analytics