In my last report dated April 7, 2011 I mentioned that silver had taken over the role as leader in the precious metal market. That observation was nothing really new from a historic perspective. Silver took over leadership in 2008 when world economies came to their knees. Looking back, the events back than set in place events that have driven gold-silver ratio to where it is today. As I’ve mentioned in previous reports, silver has been seen as the “poor” man’s way to play precious metals. Today the men that played it don’t look so poor.

Look back at history. After World War II the US was on a gold standard. There are many names for the gold standard but the best way to think of it is that gold was pegged at $35 an ounce. In 1971 the US officially abandoned the gold standard. Today, nearly 40-years later gold is trading near $1500 an ounce and silver in the mid-40s.

Let me provide you with a brief history of the gold-silver ratio as I have come to understand it. In 1792 the U.S. Congress passed the First Coinage Act. The Act officially established the Dollar as the US currency. The act defined one Dollar as a weight of pure silver, 371.35 grains. A Quarter Eagle ($2.50) was defined as 61.875 grains of gold. The Act legally set the gold/silver ratio at 15. In 1834, Congress passed the Second Coinage Act, slightly tweaking the gold/silver ratio from 15 to 16.  In 1873 Congress passed the “Fourth Coinage Act” which discontinued the minting of silver Dollars and decreed that silver coins above $5 were no longer legal tender. The end result of this was that the gold/silver ratio was allowed to float.

There are a lot of historic events surrounding this ratio, but from my point of view more recent history begins in 1939 when the ratio nearly broke through 100. After World War II, via the enactment of “Bretton Woods”, the ratio fell back to near 20. In 1971 President Nixon abandoned the gold standard. At that time the gold silver ratio was approximately 24 to 1. In 1972 it was near 25 to 1. In 1973 it was 38 to 1. The Hunt brothers tried cornering the silver market near 1980, causing the ratio to fall to 16 to 1. After they liquidated their huge silver position, the ratio moved back to near 40 to 1. In the early nineties the ratio went back to approximately 90 to 1. Today, it is trading at approximately 34 to one.

Below is a chart showing the years 1983 through today, which I consider “modern history”.

For those of you that want to more of the gold-silver ration, simply open a Google Toolbar and type in “Gold Silver Ratio”. Numerous websites will come up offering charts going back various periods of time with some offering great historic perspectives.

One of the points I am making here is that it’s important to make note that recent history has seen large moves both up and down in the gold-silver ratio.

Below is a Seasonal Chart of Gold prices produced and provided by Moore Research Center, Inc., (www.mrci.com). I’ve been writing about gold’s historical tendencies for a long time.   

For those of you that wish to learn more about seasonal historical studies, visit the Moore Research Center and sign up for their 14-day free trial.

Below is a Daily Chart of the June Gold contract.

Each individual “green” bar on the chart represents one day’s trading session, except the last bar which represents trading through the time I captured the image.

In “red” I have plotted the 18-Day Moving Average of Closing Prices, in “dark blue” the Swingline Study and the “black dashed line” is the Bollinger Band Study. The Swingline Study is shown as a “brown” line.

In my last report I summed up this particular section by saying; “Support looks solid at the 18-Day Moving Average of Closing Prices. Given the historical charts bull year tendencies, I like the idea of buying on breaks, not buying against the Bollinger Top.” Unfortunately prices did not fall back to this moving average, but have remained well entrenched over the 18-Day Moving Average of Closes Prices, which is bullish.

Prices have also been pushing against the Bollinger Band Top, which again is bullish and the Dollar remains well entrenched in a downtrend, which again is bullish.

Traders have centered on the accommodative stance of our Federal Reserve versus the stances of other key central banks. Some think the Fed is behind the curve, while others think the Fed is playing the economy correctly. If price is your gauge of measurement, I think it fair to say the market thinks the Fed’s stance being too accommodative given the break in the Dollar, rally in the Eurocurrency and rallies in gold, silver and food commodities.

I don’t think it’s uncommon for markets to pick round number as support or resistance points. $1500 gold is to me a “magical” number as I like to call it. I use the term “magical” when a number occurs that the press picks up on and runs headline news about it. To me $1600 won’t be as “magical” or as newsworthy as $2000 will be. It’s sort of like the Dow Jones going to 13,000. 12400 to me is not a magical number, but 13,000 in my opinion would be.

 if one want’s to buy, the problem is where and what stop to use. In terms of the last break low, I see this as $1445, the most recent Swingline Low. Support would be the 18-Day Moving Average of Closes, $1457.3.

If you look at the gold-silver ratio, it is pretty clear that gold is not acting as strong in relative Dollar terms as silver is. In fact the gold-silver ratio is accelerating down as silver prices gain in relative terms on gold prices. Both metals are maintaining bullish price action, but silver is clearly outpacing gold in terms of gaining value. I don’t make it a practice to recommend buying against a Bollinger Band Top and see no reason to change so buying gold on rallies right now is not recommended, even though I am bullish.

As long as the Slow Stochastic reading stays bullish, embedded, price breaks look to me to be buying opportunities. At the same time, seeing practically nothing but bullish stories on gold in the press is bothersome. For example, hearing today about a university putting 5% of their assets into gold falls into the type of news item that I look for when markets get overheated. I don’t think gold is yet as overheated as it will ultimately become, which means I remain bullish, but nervous about buying to a $50 rally that has taken place in but 6-days.

Another thing to look for is when you go out in public, ideally with friends, to stores or whatever and hear lots of conversation about silver or gold. If you hear about it where you normally don’t, it might be time to become cautious. Think back to real estate bubble and all the people investing in real estate that had little business in doing so. I recall conversations with my barber, house painter, waiters in restaurants and so on bragging how much they were making. I am not implying that gold or silver are yet where real estate was. I am simply concerned about crowd mentality and gold clearly being the laggard in this leg of the bull market.

Given the historical pattern gold seem to be following, the odds favor that the second half of the year will see even higher gold prices.

The key to keeping up with my trade recommendations is through my Twice Daily Written and Oral Updates. That is where I put out specific trade recommendations covering all the markets I cover with twice daily updates to them. I rarely put out specific recommendation in this Gold Report since it’s easier to use my Twice Daily Updates than this report which is limited to but once a week.

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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. Chart data is courtesy of LGP-IraCharts. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of The Linn Group, Inc or The Linn Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are not indicative of future performance.

-- Posted Thursday, 21 April 2011 | Digg This Article