Gold/Silver Ratio Stuck

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 2.2%

A couple of weeks ago, we said we'd get back to you when the gold/silver ratio hit a 37-to-1 objective ("What's Next For The Gold/Silver Ratio?").

Well, it hasn't happened yet. I mean, the ratio—basis London spot—has dipped. On March 10, the date our feature was published, gold's price multiple (PM) was 40.5x. When the metals' prices were fixed on March 23, the multiple had slid to a new low of 39.2x.

Gold/Silver Multiple

(Click charts to enlarge)

The downward trajectory of gold's price multiple has been essentially stalled, giving up inches grudgingly. That's not surprising, given the terminal phase of its decline. We're talking about giving up only two more handles for this phase to play itself out.

The slowdown's largely due to the "risk off" switch being pulled recently. The gold/silver trade—that is, trading silver on the long side, gold on the short side—is a risky trade, at least when market liquidity and volatility are considered.

Confirmation of the risk switch's current position came yesterday when mining stocks shot up—senior mining stocks like those producers tracked by the Market Vectors Gold Miners ETF (GDX), which jumped 7.3 percent. Junior mining shares, represented by the index underlying the Market Vectors Junior Gold Miners ETF (GDXJ), in contrast, rose only 3.4 percent.

The disparate performance of the big guys vs. the little guys dropped the Gold Miners Ratio (that is, the quotient of GDXJ/GDX) back down to 65.3 percent. That's not the lowest point for the ratio, but it's an indicator that bigger (read: less risky) is better for PM investors.

Gold Miners Ratio

Will the risk switch remain in the "off" position? No. Eventually, investors will be emboldened again. Will it be today? Next week? Hard to say.

But, like we told you on March 10, we'll let you know when we see it.