iGold

Silver has been the laggard of the precious metals sector as of late: while gold has just broken above its 2016 high of $1,378 on the heels of trade war tensions and the possibility that the Federal Reserve may lower interest rates this year, silver has barely budged.

Year-to-date, silver is down 3.5% to $15.00 per troy ounce as of the end of the week. Meanwhile, gold is higher by 9.3% or $119 for the year, to $1,400.

What are we to make of this continued underperformance by silver? Is it a sign that the move in gold is suspect and should not be trusted? Or is it a sign that we are simply in the early stages of a new bull market?

Let us examine the present period in silver prices, the modern history of the gold to silver ratio, and what this might mean for silver investors going forward.

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The Federal Reserve is on the verge of a credibility problem: the market does not believe the central bank at its word.

Let us rewind: at the January 30, 2019 Fed meeting, the central bank wavered on its 2015 – 2018 interest rate hike campaign and began to hint that it would at least pause for the intermediate-term on further increases. This was a significant departure from the 2015 – 2018 period, which saw rates rise from zero to the present 2.25% – 2.50% in three years.

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The gold price has been strong recently, having risen over $180 from the August 2018 low of $1,167 to the peak above $1,347 as of last week.

There have been solid fundamental reasons for gold’s run: primarily, the Federal Reserve last month hinted that it may not continue raising interest rates, as it had been assuring it would over the past three years. Such in turn has been considered a sign that the Fed may in fact reverse course and begin cutting rates later this year, which is generally considered negative for the value of the dollar and positive for precious metals.

However, are these fundamentals enough to keep bullion’s run alive? Will this market narrative continue going forward?

A Rare Warning Signal

Despite the recent performance, one of our proprietary technical indicators is flashing a major warning signal for those who follow the language of the charts. Specifically, gold is showing a sell signal witnessed only four times over the past eight years. This warning signal coincided exactly with the absolute peak in gold at $1,923 in September, 2011. This same signal appeared again in January 2013, immediately before gold fell $500 from $1,680 down to $1,180 over just six months.

So reliable has this signal been, that it has never occurred without gold falling at least $130 over the subsequent six months.

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