Many have written about the gold/silver ratio as a leading indicator of risk and equity appetite (see here and here) so we won’t take your time explaining the relationship. � We do point out in our chart the speculative blow off and subsequent massive correction in silver without a corresponding move in gold has increased the gold/silver ratio by 35 percent in the 19 trading days since April 25th. � This is the largest percentage move in the ratio since the silver ETF (SLV) began trading in 2006.
Though the move, in part,� may be just correcting the froth in the silver rally it may also be signaling global risk aversion and flight to quality.� Note the big move in the ratio which began at the end of July 2008 several weeks before the financial crisis and collapse of Lehman Brothers. � The chart also shows the S&P500 continued to rally before turning down at the end of August.
Cross market indicators are often unstable, rarely unambiguous, and must be interpreted within in a larger context. � However, the spike in the gold/silver ratio coupled with confirmation from other risk indicators, such as Treasury yields, the Hang Seng, and the convergence of several macro swans increases the odds,� in our opinion, of a fairly sharp correction in the risk markets.
Note the data used in chart are from the corresponding ETFs and the ratio is inverted in order to more easily track the S&P500. (click here if the chart is not observable)
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