First and Last Word on Metals and Mining

It is a commonly held belief by many precious metal investors and even a good percentage of market pundits that silver always outperforms gold during the latter stages of a precious metals rally. When the chart action goes parabolic — such as in January 1980 or May 2006 — silver is at its most profitable, or so the thinking goes. The truth, however, is that silver outperforms gold only during orderly and strong price advances that remain trend-bound. Once gold and silver prices achieve the wildfire stage, the blond metal can outshine its albino sibling both on the way up and especially on the way down (by falling less, of course). With incorrect notions in hand about gold and silver price action, both pros and amateurs can make fundamentally-mistaken allocation decisions in their precious metals portfolios that can be painful in the short and long run.

We will employ a visual construction in this analysis that essentially reconsiders the traditional market perception of gold/silver prices and ratios. At first our approach may appear a bit convoluted but even cursory study should reveal its utility. What we have done is plot the gold and silver price on the same chart, adjusting the silver price by a factor that causes a confluence with the gold price at each market top that we are attempting to analyze. For example, the market top in January 1980 occurred near a ratio of gold to silver prices of 20-to-1 so we multiplied the silver price by 20 on that chart. The gold/silver ratio has also been plotted on the chart with red arrows drawn to indicate the trend during each market phase.

Prices are COMEX daily highs for the futures contract that was active during the market top. There are no contract rolls or continuations using this method and therefore prices become sharper and more focused as time passes. This is because the contract goes from lightly traded in the outer months to heavily traded as it becomes the front month. Furthermore, plotting only the daily high removes a lot of noise and magnifies the trending characteristics of each rally. The net effect is subtle but useful in a way that would take a long time to describe in words so we’ll let the charts do most of the talking.  Note that each chart is also labeled with a graphic to indicate the phases when silver is in a strong, sustained price advance. Interim price peaks and blow-offs are visually separated to help isolate price action and gold/silver ratio changes during these market events.

While it would be preferable to use spot gold and silver prices for our analysis, the lack of historical (and current) spot price granularity would blur or even obliterate many of the relational features found in charts constructed from active, exchange-based market data.

Let’s now look at the first chart, which displays the classic 1979-1980 rally in gold and silver ending with the ultimate blow-off high on January 21, 1980. The chart shows that, amazingly, the vast majority of that historic price rise occurred during just two 45 day periods. Moreover, almost the entirety of silver’s relative strength was limited to these two short intervals of time as indicated by the vertical arrows pointing down in the below chart. Note that our unique chart construction makes silver look like a machine on a mission. It is actually gold that appears to be careening out of control as the afterburners are lit during the final few days of this historic move.

Note that the gold/silver ratio spent the vast majority of its time during 1979-1980 drifting sideways or slightly up while silver was not advancing strongly. Of particular note is that during the interim price peak of early October 1979, the gold/silver ratio interrupted its ultimate decline to under 20-to-1 and did not resume it until gold and silver prices started to strongly advance again in late November. Moreover, most of the relative gains in silver were made while advancing into the interim peak in October and not the final blow-off in January.

As the rally went parabolic in early January 1980, the gold/silver ratio actually flattened out prior to turning up sharply in March (not shown). Therefore, the time to profitably own silver over gold was actually quite limited in duration and it certainly did not include the final blow-off stage, especially given that silver was back to $10 by April 1980 (not shown).

The above chart obviously shows a peak high for COMEX silver slightly over $40 whereas spot prices reached and even exceeded $50 around January 21, 1980.  While this is a valid point, it doesn’t materially change the story told by the above chart. Gold at $850 and silver at $50 results in a gold/silver ratio of 17-to-1 which is exactly where the chart shows the ratio bottoming during the demarcated blow-off stage. In other words, using spot prices would still result in the same conclusion that silver did not outperform gold during the January 1980 blow-off whereas gold did substantially better during the subsequent price decline (not shown).

The only logical conclusion to be drawn from the above chart is therefore that silver should have been sold for gold at the start of January 1980 well before the famous blow-off got to its spectacular final stage. If your newsletter writer, broker, analyst or pundit doesn’t know this then how in tarnation will he or she provide useful guidance much less advice the next time such a blow-off takes place?

Let’s now move along and look at the next chart, which shows the 2003-2006 period. Here was a long rising market with at least two interim peaks and a very exciting blow-off that had both COMEX silver and gold going parabolic. This particular stage of the precious metals bull market was marked by long advances during which silver maintained a relentless climb and the gold/silver ratio fell. Once again, the declines in the ratio correspond directly with strong but trend-bound advances by silver. As price peaks and the blow-off stage are approached, however, silver no longer outperforms gold and in fact surrenders much of its relative gains during the subsequent price decline. The May 2006 blow-off is particularly interesting as it marks an obvious low in the gold/silver ratio prior to the top in prices. In fact, gold continues to rally even as silver’s first parabolic rise fails. Remember, we are looking at daily highs here and so it is quite possible that other charting methods will not reveal this relative price action in such obvious detail.

As the Q&A embedded in the chart suggests, there is a fundamental difference between the behavior of prices and the gold/silver ratio during the interim peaks compared to the final blow-off stage. Interim peaks are marked by an almost inverse relationship between gold and silver prices and the gold/silver ratio whereas the blow-off is associated with a sudden correlation between the gold price and the gold/silver ratio as a result of gold turning on the afterburners in a late bid to outshine its monochromatic kin. If we look back at the 1979-1980 chart, we can make a similar observation with some caveats. Namely, the October 1979 interim peak shows a sloppy inverse relationship whereas the January 1980 blow-off suggests a sloppy direct correlation. Note also that it is gold finally going vertical that seems to mark each blow-off, which of course is consistent with the idea that silver literally loses its edge right before the rally ends.

Another point that may be worth considering is that interim peaks seem to be accompanied by more gradual rallies in the price of silver and steeper declines in the gold/silver ratio. Blow-offs meanwhile appear to be preceded by steeper advances in the silver price and more gradual declines in the ratio. Let’s keep this in mind as we look at the final chart in this analysis, the period from 2009 to today.

By now all of the relationships should be familiar: strong but trend-bound advance in silver associated with declining gold/silver ratio, interim peaks with stalling or reversal of the fall in the ratio, no blow-off without gold going vertical. Note that the most recent price advance was much stronger and steeper than during the preceding interim peak but the ratio also declined more sharply in the Sep-Dec 2010 period. This actually doesn’t look all that different from the period immediately preceding the 2006 blow-off. The conditions apparently required to fulfill such an outcome include gold going vertical while the gold/silver ratio turns up.

Other possibilities outside an imminent blow-off could include:

(1) Interim peak preceding 1979-1980 or 2006 style blow-off.
(2) Interim peak with no blow-off to follow (2003-2005 style).
(3) 2008 style topping (multiple peaks, high level consolidation).

The best comparative fit in our opinion is an interim peak before a 1979-1980 or 2006 style blow-off because both the price and gold/silver ratio exhibit similar geometry compared to those prior events. For this thesis to hold, any pullback in the gold price should ideally be shallow and immediately followed by basing action during which the gold/silver ratio remains steady.

The following chart is basically the same as the previous one but some of the markings have been removed and the confluence factor has been recast to 35 under the assumption that the next blow-off will happen near a 35-to-1 gold/silver ratio.

In our opinion, the current price advance in the above recast chart appears analogous to the interim peak in October 1979. The hypothesis would be negated by a strong rise in the gold price accompanied by an upturn in the gold/silver ratio.

In summary, the two favored scenarios in the current precious metals market according to our unique reconsideration analysis of gold/silver prices and ratios are an interim peak or a blow-off. Further price evolution is required before either theory gains credibility but it should be noted that the modeled relationship between gold and silver prices and the gold/silver ratio suggests silver will not outperform gold by a substantial margin in either case. One may wish to consider the investment implications and portfolio allocation factors resulting from such a conclusion derived from the foregoing analysis — but not before also evaluating the possibility that the strong recent advance in silver prices will simply resume in short order and thereby provide impetus to a substantial further decline in the gold/silver ratio. Trend-wise we are getting long in the tooth for resumption in the price advance and therefore we will assume for now that failure to achieve new highs in silver by mid-January brings into play the scenario involving “interim peak preceding 1979-1980 or 2006 style blow-off”.

There are a number of other obvious conclusions that can be reached from this reconsideration analysis. We’ll reserve our own interpretations and integration with other analyses (such as the gold basis) for the benefit of Metal Augmentor subscribers. The last few Founding Memberships are going fast and we will probably never offer this premium level of subscription after we close the sign-up window on January 12, 2011 — and certainly not at the ridiculously-low current price.

About silverax

Tom has been told he is arrogant. Unfortunately only very strong medication will apparently chill him out, but he doesn't like to put things in his body that might dull his sharp mind. Which is like an ax. And no, he is not a Scientologist. He can, however, turn lead into silver by concentrating very hard. See picture for proof.
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38 Responses to Gold/Silver Ratio ReconsideredComment RSS Feed

  1. forwill

    Thank you guys for your continued hard work, pragmatism and willingness to stick your necks out a bit when predicting future events with a stated timeframe. So many others make weakly or wholly unsupported statements like silver always outperforms gold at tops, silver will become rarer than gold(when?), and by nature, the G/S ratio will return to the neighborhood of 15.

  2. Peter Wright

    I first invested in silver in 2003, and it was shortly after this that I read Marc Faber’s Doom,Boom,Gloom report in which he stated that it was good to be in silver in the early stages of a precious metals rise, but thereafter, he considered gold to be better.

    I also remember Jason Hommel back in about ’06 mentioning that he would trade his silver for gold when silver got 1:1 with gold.

    The only comment I’ve heard Jim Sinclair say was at one of his investor’s talks in Toronto, when he said that when gold reached $1225, if silver was not above $23.50, then one should seriously question whether silver had as much upside as gold. (Because a low price would show that it was performing as an industrial metal and not as an investment). (And silver only reached $21 at that time.)

    I still tend to go with silver as the best horse to back, but this study has shown the need to be careful. Thank you for your analysis.

  3. Norm Williams

    I knew silver was more volatile than gold, but did not know about the gold blow-off scenario until now. There is a lot of talk about silver price suppression by “The JP Morgue” using naked short selling on the COMEX and a shortage of physical for manufacturing purposes such that some say the gold/silver ratio can go from 47 currently to 15 or 10 even. I have money in the Central Fund of Canada ETF which is about 50% gold and 50% silver. Will hold this until I hear from you guys next. Thanks.

  4. forwill

    This rounding over or what I believe you’re calling high level consolidation sure supports your theory for another runup. Volume on the SLV ETF has returned to a more normal level too. I don’t have the smarts to guess how much of this is due to the holidays.
    Shoot, using ratios of 40 and 35, gold 1600 means silver 40.00 and 45.71! Gold 1550 means silver 38.75 and 44.29.
    Your gutsy call of a ratio of 35to1 gives us advance warning for a place to take action in what could be one of the wildest rides in a long time.

  5. evander

    Given the assumption that gold will rally at least as well as silver, if not better, in a final blow-off rally and silver will sell off more than gold in corrective phase, a strategy of being long call options on gold futures (or ETF) while being long put options on silver futures (or ETF) could set you up for a possible win in a blow-off or a major corrective phase. Of course getting the Gold call and Silver put strikes, expiration dates and option price optimized would require some additional level of analysis.

  6. thefroggydude

    FOFOA makes a compelling theoretical case for gold as a monetary asset in the long run but not silver. This article was featured at Zero Hedge and was widely criticised. I have no crystal ball to predict the final outcome so I hold both Au & Ag physical bullion with a greater weighting for gold (8 to 1). Gold is money but silver may just be an investment asset. Either way, everyone should hold physical gold as part of one’s portfolio (IMHO of course).

  7. broxburnboy

    I’ve got my own theory on Silver/Gold ratio:
    Eventually (sooner than later) the USD dollar will be revalued to gold to stabilize the world monetary system.
    The PM markets are the most manipulated by the owners of most of the gold – the central banks and their nominees JPM etc.
    Their interest is to manipulate an orderly price rise to the eventual peg price. The gold silver ratio will be set at 50:1 (as in 28 dollar silver/1400.00 gold) and silver then allowed to trade freely as a non-monetary commodity.
    Going forward both markets will rise within striking distance of this ratio.
    The eventual peg price will be the number of gold ounces finally held by the US divided by the national debt – about 8000.00 /oz.
    Call me crazy… but that’s where the logic takes us.

  8. howard



    This part of the post is not meant for nuwrldudder, but to clarify the OVERALL PICTURE of the MARKETS. The Metal Augmentor just put out a new article titled “THE GOLD/SILVER RATO RECONSIDERED” I had a paying membership to the Metal Augmentor last year as I wanted to learn more about the GOLD and SILVER BASIS. Tom Sazbo started the service with David Zurbuchen. This article I believe was the work of David Zurbuchen.

    This was the summary of their article:

    In summary, the two favored scenarios in the current precious metals market according to our unique reconsideration analysis of gold/silver prices and ratios are an interim peak or a blow-off. Further price evolution is required before either theory gains credibility but it should be noted that the modeled relationship between gold and silver prices and the gold/silver ratio suggests silver will not outperform gold by a substantial margin in either case. One may wish to consider the investment implications and portfolio allocation factors resulting from such a conclusion derived from the foregoing analysis — but not before also evaluating the possibility that the strong recent advance in silver prices will simply resume in short order and thereby provide impetus to a substantial further decline in the gold/silver ratio. Trend-wise we are getting long in the tooth for resumption in the price advance and therefore we will assume for now that failure to achieve new highs in silver by mid-January brings into play the scenario involving “interim peak preceding 1979-1980 or 2006 style blow-off”.

    The reason why I use this article is a perfect candidate for TECHNICAL ANALYSIS. Zurbuchen goes back using several graphs from 1979-1980, 2004, 2006, and present to show relationships with the price of SILVER and the GOLD/SILVER RATIO.

    Zurbuchen tries to show that the PAST is what is INSTORE for the FUTURE. That is why he states a PEAK or BLOW OFF is next in the PRICE OF SILVER as this is what has taken place in the past 4 time periods. This is TECHNICAL ANALYSIS (TA) at its finest. On face value, you cannot disagree with this sort of assumption….but if we consider the present Financial Situation and Fundamentals, anyone who follows the advice given in that article MAY BE MISLEAD.

    What Zurbuchen fails to INCORPORATE in his model is the DERIVATIVES MONSTER on top of present SHORTAGES OF WHOLESALE SILVER. Back in 1979-80, there were no Interest Rate Swap DERIVATIVES whatsoever. According to Willie’s article, the first Interest Rate Swap was done in 1981. ALso, we had a huge stockpile of silver as silver was removed from coinage in the early 1970′s. Don’t forget the 100-1 Fractional Reserve Paper trading at the BIS, LBMA and COMEX in Gold and Silver. How can these analysts be so FRICKEN BLIND??

    This is where I beleive TA becomes increasingly worthless. It is good at showing PRICE or MARKET DISCOVERY if and only if the FUNDAMENTALS are sound.

    Think of it this way. TA is excellent when determining say how the TITANIC will react in certain conditions, wind speed, ship speed, weather and etc. TA works great when plotting out a course using all these varibles. The problems arise when the TITANIC hits an ICEBERG. At this point, TA becomes worthless as the only option remaining is total DISINTEGRATION….or should I say a SINKING of the SYSTEM as a whole.

    The BIG BANKS are HEMORRHAGING like never before in history. The WAR IS IN THE BOND MARKETS. Like ENRON….the day of reckoning is aproaching. ENRON was able to FOOL the world into believing they could SELL FAKE ENERGY like it was REAL ENERGY.

    The BANKS, US GOVT and FED have done the same thing. They have SOLD FAKE INVESTMENTS like they were real. This thing will end BADLY when the United States heads into STAGE 2: THE COMMERCIAL COLLAPSE. This is when all faith in the currency is lost and HYPERINFLATION becomes the norm.”

  9. @howard
    I didn’t realize Hommel’s subscription still existed. I have a complimentary subscription that was negotiated a long time ago, but I haven’t logged in for probably at least a year. Does it now literally just consist of a forum and are people still being charged the same monthly amount for this?

    Whatever the case, thank you for bringing this to our attention. He got it wrong that I wrote the article. Full credit (and all of the good kind IMHO) goes to Tom Szabo on this one. So I’ll let him duke it out with Jason if he has the desire, but my best guess is he won’t.

  10. David

    I bet this is not Jason who posted this critique of Tom’s gold/silver analysis but rather the nubian goat farmer and former MA subscriber SRSRocco. He has been predicting “DISINTEGRATION” ever since MA was founded, and he finally left in disgust presumably because the world had not yet ended and because subscribers became deaf to his rhetoric and excessive use of all-caps. He has been beating the same drum for years that TA has zero merit yet ironically had he followed some of the accurate calls that Roy Martens had contributed here, he could have made a lot of money to purchase goat feed.

  11. @David
    I thought there was something familiar about those ALL CAPS EXCLAMATIONS, and was a little surprised to see Jason employing that technique. Makes better sense now.


    Tom & Zurbo, so we are getting close to 40:1 ratio, any more thoughts on this?

  13. Our recent market update (late January I believe) mentioned that the lack of gold moving higher in the January timeframe given originally meant that we did not in fact have a top in January and so one possibility was a continuation with silver gaining on the ratio until we did reach some sort of top in the short term. Right now my sense is that we are still not looking at a blow-off but rather a mid-cycle topping in gold/silver based on hot money speculation along with strong retail and physical demand that is putting pressure on available supplies, particularly in silver. Hard to predict where it goes but my vote is that we do not get some huge long-term breakout by silver but rather a return back soon to range trade in both price and ratio. My other thought is that only a misinformed rank amateur or adept speculator should be buying silver here — personally I am selling incrementally and we are likely to take action in the portfolios this week as well.

  14. David

    I agree that it is no time to add positions in silver unless you want to roll the dice and buy some out of the money April silver calls, like 37-40 strikes. However, I would not have an itchy finger to sell positions just yet. I don’t think this rally in silver and gold is about to roll over. Funds will probably be buying gold when the market opens, and silver has its own engine. 39k contracts were traded from 5-10 pm CST in the access market, and the bears have brought it down just a little. There are buyers. Are there sellers? Shorts are covering, and are wounded. The more they drive or hold the price down, the more buyers come in to compete with the shorts, both buying. Who is selling?

    If you are one of those that think silver and gold have been overbought since September, then just wait. You were wrong then, what makes you think you are right now?

    If silver makes a sharp correction down below 30 this week, jump on physical and April 33 strike call options.

  15. @David
    The rally could roll over at any time, I’m not aware of fundamental factors or compelling technicals requiring gold or silver to go higher in the short term. In my opinion it is also a bit of dangerous thinking to refer to “wounded” or in general to ascribe motive or ability to market participants. Such things, in the infamous words of that master of military strategy, Donald Rumsfeld, are “unknowable”. By comparison, you will rarely go wrong by incrementally buying weakness and selling strength in a bull market while maintaining a core position.

  16. David

    I appreciate the cold water as caution. I do not want to influence other investors to do something dangerous.

    I probably will change my opinion and positions if gold does not close at new highs within a week.

    Buying weakness and selling strength in a bull market is a good strategy. Being right and sitting tight (ref Jesse Livermore) is even better.

  17. @David
    I think tomorrow could be the buy day (brief visit under $30). The weak close suggests at least one day of follow-through and it is also getting close to first notice day for March COMEX silver, and by no means does it look like many of the longs are going to be standing for delivery — far from it.

  18. David


    Last delivery period, I think the first notice day was 11/30/2010. There were six green daily candles in a row that began there. At the risk of being exposed as a charlatan, do you think there is anything to the idea that the hedgers allowed the price to drift higher to get the funded positions to settle for cash? The premise here is that there is indeed insufficient good delivery bars to settle via physical delivery for those that would otherwise stand for delivery and wait for higher prices.

    Under 30 would be nice, and if so I plan to buy a little more physical, and April 32 or 33 call options if this happens.

  19. David

    Not meaning to be dogmatic or argumentative, but this is the type of information that makes me think there is tight supply in the commercial silver arena, and the reason I have been busier than normal accumulating physical:

    Dave Madge director of sales at the Royal Canadian Mint:

    “Demand right now for silver is through the roof and it shows no signs of slowing at this point. Sourcing silver is becoming very difficult. We are competing with a great many players when it comes to purchasing silver and many of these players are bidding the price higher.”

    “Our advantage is that we have had long-term relationships with our suppliers and that has helped us in this situation. We have been able to leverage off of those relationships to get supply, but it still remains a big challenge sourcing material. We’re looking at ways of mitigating our risk regarding supply of silver.

    We are anticipating it to become even more difficult to secure supplies in the future. This is based on what we are seeing firsthand and what our suppliers are telling us. We work closely with these banks to secure silver and they tell us there is a lot of competition.”

    “I think you are going to see the premiums go up in order to secure silver. At some point some players will be priced out of the market. I don’t think this is a short-term situation, I think there are a lot of issues going forward and this may be the new norm.”


    On the other hand, I am certainly aware that nothing goes straight up forever, and this has been a pretty spectacular rally since July.

  20. @David
    There was very little in the way of delivery notices so I doubt it — part of the price rise could perhaps be explained by the possibility that some industrial users are sourcing directly from refiners with the accompanying lag forcing them to maintain more than just in time inventory. By extension, they would no longer be relying on COMEX stocks at all.

    Hmmm…”director of SALES”…I wonder if he went on King World News for charity? Not to say there isn’t a lot of truth to his statements but the guy is freely mixing facts with opinion. This same statement could have been made 3 or 4 years ago and it would not have been out of place — yet silver still managed to drop under $10 and spend quite a bit of time around $15. In other words, it’s a good explanation for why silver is over $30 today but it’s quite a leap of logic to extend this thinking forward to support the contention that much higher prices are in store. There will certainly be periods of liquidation — and in my view the more silver that investors hold, the more silver is available for liquidation. Under the right circumstances, it could definitely end badly (for those who manage to buy a secular top). If you aren’t at all open to the possibility, you sure as heck ain’t gonna recognize it.

  21. forwill

    @silverax In post #13 above you said ” personally I am selling incrementally and we are likely to take action in the portfolios this week as well.”. I took this to mean that you were selling a portion of your personal silver bullion holdings. My question is, did you and was your decision based primarily on the gold/silver ratio?

  22. @forwill
    No I haven’t sold yet this week and no it isn’t the G/S ratio but rather something I have been doing on strength when silver goes over 30 and as long as I can get a good price from the dealer (mostly I’ve been selling odds and ends) — I probably won’t buy back any physical until we get back toward the 200dma, in the meantime I can leverage the proceeds in the market (and hopefully not lose any, but even if I lose the difference between the point I sold vs. where I buy back, I’m still technically even, of course need to consider taxes as well). Note this does not involve my core position which is held as insurance.

  23. forwill

    I noticed the gold/silver ratio is under 40 today. Last week gold had a solid bounce off its 50 DMA. The dollar has failed to hold at 76. The distance between silver’s 50 DMA and 200 DMA is still a gaping chasm, but they are rising in a parallel fashion. Do you think we could be approaching a blow-off scenario now?

  24. forwill

    Another thing I noticed was that in the market selloff last week the dollar didn’t get any love even with all the Yen shenanigans.

  25. @forwill
    I think we are getting closer to a rally high — it could certainly be accompanied by meaningful new highs but at the moment I’m inclined toward any highs being of the marginal variety. That said, the market is on a razor’s edge and it wouldn’t take much to justify another big speculative move into gold/silver/etc. to end things in the short term with a nice flourish.

    Quite a bit of selling in dollar-denominated assets (Treasuries, etc.) in order to repatriate Yen — this is very likely having knock-on effects with other traders piling on. Potential for a very temporary effect.

  26. David

    This is off topic, but could you give your thoughts on the prospect for hyperinflation in the US?

    There is always a lot of talk about this among analysts, but particularly a lot more chatter lately.

    I am not looking for a serious analysis and would not quote you on your opinion later. Anything anecdotal would be useful to me in terms of how much physical metal to allocate to my portfolio.

  27. idiotic

    While we’re waiting for Silverax, you might want to peruse Martin Hutchinson’s latest essay over at Prudent Bear ( which deals with hyperinflationary potential. Hutchinson usually presents a reasoned, considered viewpoint.

  28. @David
    I have studied this quite a bit lately and have come to the conclusion that hyperinflation in a developed economy requires (1) a collapse in private sector economic output which is (2) supplanted by government deficit spending financed by (3) money printing because (4) nobody is willing to buy additional sovereign debt. The whole enchilada is underpinned by economic output — if it is expanding in real (and perhaps even nominal) terms then hyperinflation would be quite unlikely. I note that during the 1970′s the U.S. had a very strong growth in nominal GDP thanks to moderate inflation (see and that in large part — quite counterintuitively — might have been the reason why hyperinflation was avoided. For various reasons the raising of short-term interest rates to punishing levels may have been quite risky earlier in the 1970s decade but by 1980 the effect was merely to cause a moderate recession — this due to the incremental effect of elevated inflation on household finances, which in fact had become relatively stable by the late 1970s. Note that the impact on government debt of raising interest rates was to increase demand for them, which immediately knocked out one of the hyperinflation pillars (that of nobody being willing to buy additional sovereign debt). I’m fairly confident that Bernanke & Co. are attempting to navigate a similar path again, using QE2 and other delay tactics to bide their time — a big raise in short-term interest rates would probably be catastrophic at this moment because of the precarious nature of household debt such as home equity and variable rate mortgages tied to short term rates. Clearly this is just scratching the surface and when I get a chance I will definitely be writing a formal piece but I think this might give you enough tools in the meantime to make some self-assessments about imminent risk of hyperinflation.

    Hutchinson seems to be missing the economic output leg from his hyperinflation model. Thus his wishful thinking of a mini-Volcker — personally I don’t think it is possible to raise short-term rates to 6-7% right now without crashing housing again and in turn the economy. If anything, that would bring hyperinflation even faster. My suspicion is that guys like Hutchinson fail to consider the regulating influence of the Treasury markets. German bonds were issued at coupon interest well below inflation rates even in 1923 and thus had effectively zero influence whereas U.S. Treasuries are one of the largest markets in the world and the second-to-last bastion of capital flight to safety (the last being gold). When accounting for this influence, there is probably quite a bit more policy flexibility and available time to act before it is truly too late. Once again, my suspicion is that the Fed is delaying until conditions are more ripe for the extreme policy shift required to keep things afloat.

  29. David



    Thank you gentleman for the article and your response.

    I re-read the g/s ratio analysis above, and after today’s action in silver, I exchanged some silver for gold.

  30. @David
    We’re probably right behind you!

  31. David

    Tulving seems very good for trading physical silver for gold if you have enough to trade for 20 ounces of gold and thereafter 10 ounce lots. They provide the Lloyd’s of London insurance and the UPS account number to ship your silver.

    In 45 days I gained about 18 percent free gold compared to if I had bought gold instead of silver 45 days ago. If you trade in silver from years back, especially near the lows of 2008, you can lower the cost of your gold that you hold considerably.

  32. David

    If we do have the gold afterburner/2006 style blowoff peak, then out of the money gold call options would be a good strategy. I just picked up some June 1550 gold calls for $650 at market close today. I am also trying to get filled in 1600 June gold calls for $300.

    June 1550/1600 call spreads for $300 each might be a better way to go. Risk $300 to make $4700.

    Some analysts see a potential blowoff top in gold during the next three months. I found this from Roy Martens:

    I think the ideal setup would be August 1600 gold calls with a chance to short gold at 1600 if those calls go in the money. It is however too much risk for me to take because the August calls are considerably more expensive. I have my doubts that 1600 will be reached before summer, but I cannot risk being on the sidelines without any upside exposure to the possibility, so the call June options are about the best way I can think of to redeploy recent profits.

    He might be right or not, but

  33. GleamBright

    I would be most interested to see how an analysis of the ratio between the gold and silver basis affects the above analysis – were there any leading indicators in the basis about the relative movements between gold and silver prices? And what are the implications of the ratio of the gold/silver basis for the current market? For example, there were limited indications of the current drop of the gold/silver ratio when just looking at price movements alone. I am sincerely hoping that this service will be able use the basis to provide recommendations about relative movements between silver and gold so that I can ride my PM portfolio to maximum advantage. I am reluctant to rely on technical analysis of prices alone for future decisions expecially when the basis is meant to be such an important indicator not only for individual prices in gold/silver but also for the ratio between the two. I suspect that the future will be different and fully expect the market to do a ‘switcheroo’ when compared to past markets, just to keep everybody guessing. Can you provide comment? Or, is historical daily data available of the gold/silver basis back to 1970? My curiosity is getting the better of me, and I wonder whether opportunities are going begging.

  34. @David
    Yes, but if you are trading frequently then I would say the best turnaround and lowest spread will be found in the SLV/GLD combo although with tax considerations some other exchange products with small spread might be a better way to go.

    August is a bad time for call options in gold and silver, I think you are probably on a better path with June. My sense is we get yet another delay before the last hurrah for this run if we are to make a final new high. Otherwise I suspect we are near if not already at the end. The catalyst might be Ghadafi’s defeat and stabilization of Fukushima without anything new to consume the market with worry.

  35. worldskipper

    Ok the ratio touched 35 today. Any thoughts?

  36. @worldskipper
    We are not in a blowoff but rather intermediate peaking/trend, which remains somewhat consistent with my adjusted sentiments after not seeing gold make its big move at the beginning of the year. I am trading in silver for gold on each couple % drop in the GSR and we are probably going to make some significant moves in the portfolios very shortly as well. I note silver almost touched its all-time COMEX high early Monday (not $50 as most people would think but $42.50 — the $50 was only hit on OTC and not exchange trading).

  37. David

    Any reads on this gold/silver rally that began in early July? Is the Market forming an intermediate top or is this a breakout and orderly continuation of bull market?


  38. I’ll address in update but basically we still appear to be going for the targets laid out here for late June. So from that perspective we could be a few weeks late and on that basis we could be starting the grinding action in the days/weeks ahead (silver arguably is already in that action with the sojourn over $40 this week potentially being a high spot). Eidetic does offer a different possibility for a gold rocket above $1600 if it is in fact exiting upward out of a multi-year channel but that requires acceleration from here as momentum could be quickly robbed, turning the move into a false breakout in which case the next move is possibly back toward the middle of the channel.

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