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Silver Most Overbought Since at Least 1712


Many people have tried to analyze the gold/silver ratio. Here, an entirely different way to explore it.

In today's silver mania it seems you can't get through a week without coming across yet another article on the gold/silver ratio. Well today is your lucky day because here comes another one. However, this article will go far off the beaten path and explore a new way of looking at the gold/silver ratio which has never been revealed before.

Many people have tried to analyze the gold/silver ratio. The gold/silver ratio in its purest form does not appear to have much to offer with respect to forecasting value. That is because the ratio exhibits secular trend creep bias. In this study annual ratios are used as it is rather difficult to obtain daily gold/silver ratios in the 1700s. From 1712 to 1875, the ratio each year had a 14, 15 or 16 handle on it. Many silver bugs say the historical long-term ratio between gold and silver is around 16 and they are waiting for it to hit that number. In 1876 the ratio skyrocketed to 17.75. From 1876 to today gold has gone up 6,135% while silver has gone up 3,002%. The reason for this is the historical ratio between silver and gold was often imposed by the government rather than the free market. Once it was allowed to break free, the ratio has gone all over the place. Ranking the ratios does not offer predictive value as the lowest reading over the last century in is still above the highest reading of the aforementioned early years.

So the first instinct is to deposit this indicator in the garbage can. However, it has been observed by many that silver seems to exhibit more speculative characteristics than its more reserved older brother gold. In comparing the gold/silver ratio's average price (as calculated by throughout the year to the gold/silver ratio's yearly closing price (as provided by, a very interesting pattern was accidentally discovered. The ratio between the gold/silver average price for the year and the gold/silver last price for the year reached an all-time high on December 31, 2010.

What this basically means is that silver has been outperforming gold more than any time in the last 299 years.

Extremes in long-term indicators which span four centuries should always warrant attention. The next step is to see what happened next the other times when the indicator reached extraordinary levels.

The year shown is the signal year. The number in parenthesis after the year is the indicator level. This allows the reader to compare how extreme each reading was. In looking at other highs in this ratio of the ratios a certain pattern begins to emerge. Let's take a look at the top readings for this indicator since 1712 and see how silver fared in the years after this signal was given.

1. 2010 (+50%) At silver's January 28, 2011 low, silver was down 14.9% for the year. It rebounded strongly and went up 36% for the year thus far. Silver's secular bull market started 20.1 years ago. In this secular bull market silver has annualized at 12.95% a year which beats the CPI by 10.46% a year. Even if one is skeptical of CPI numbers, silver vastly outperformed inflation by any alternative measure of inflation one chooses.

2. 1967 (+46%) Silver got off to a rough start in 1968. At its February 6, 1968 low, silver was down 15.87%. This is quite similar to the 2011 pattern. Silver then went into the final blow off top of its bull market. By May 21, 1968 silver was up 16.3% for the year and the bull was finished. This bull market had lasted 20.92 years (note the similarity to the current bull) and annualized at 7.42% a year. While the nominal returns may not seem overly impressive, silver outperformed inflation by a respectable 5.28% during its two decade run. Then came the inevitable bear market. From May 21, 1968 to its 1971 low silver dropped by 51%.

3. 1979 (+45%) At silver's high for the following year it was up 43%. Once again, this marked another blow off top of a great silver bull market and the start of a 91% year bear market which lasted over 11 years.

4. 1997 (+39%) Silver got off to a good start in 1998 as it was up 28% for the year at one point. However, that was the peak for over 6.5 half years. Silver entered a bear market which took it down 48%.

1945 (+28%) Silver managed a 22% move up and peaked in 1946. It then entered a 31% bear market.

6. 1969 (+23%) Silver was still in the midst of a bear market and had another 30% drop before reaching its final 1971 bottom.

1919 (+18%) Silver dropped 81% to its 1932 low.

8. 1982 (+15%) Like most of the years listed above, silver got off to a good start the following year as it was up 41% at its 1983 peak. Like all prior instances it was just a blow off top. All those gains were erased by the end of the year and plenty more. From silver's 1983 peak to its 1991 bottom, silver dropped 77%.

What is interesting is in the year (2011) following the signal year (2010) silver lost over 10% every year listed except for 1946. What makes this so interesting is silver was up for the year 16%, 43%, 28%, and 41% in four of those years and somehow managed to finish those years -12%, -43%, -15%, -30% respectively.

Interestingly enough, there was an intersection between signal years in this article and the last silver article entitled Indicator Suggests No New Silver Yearly Closing Highs Until 2034. Those years were 1919, 1979 and 1982. Interestingly enough, the bear market lasted at least 8 years in every instance. Furthermore, silver dropped at least 77% from the peak of the following year (which is equivalent to 2011) to its ultimate low in each of those instances.

Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
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