Monitoring the 'Risk Trade' with the Gold/Silver Ratio

By: Chris Ciovacco | Fri, Jan 21, 2011
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The gold/silver ratio is not just for gold bugs; it can help us monitor the appeal of the 'risk on' trade relative to the 'risk off' trade in many markets, including global stocks (SPY) and commodities (DBC).

While gold (GLD) and silver (SLV) are often grouped together in investment discussions, gold has more of an Armageddon appeal and silver has more of an industrial appeal. Generally, when the gold/silver ratio is rising, it signals higher levels of fear and concern about the economic outlook. Notice how gold was much more attractive in the minds of market participants during the 2008 portion of the last bear market (see below).

Gold Silver Ratio 2008

The current gold/silver ratio, shown below, recently broke through the downward sloping trendline that was formed as risk assets rallied off the July and September 2010 lows. While it is too early to read too much into the break of the red trendline shown below, it is worth keeping an eye on.

Gold Silver Ratio 2010

If the gold/silver ratio makes a higher low, followed by a higher high, then our concerns would be increased relative to a possible bout of risk aversion in all markets. As of Thursday's close, the risk-on trade still rules the day. Sentiment and possible overhead key S&P 500 levels are two other ways to keep an eye on the health of the current bullish trends in stocks and commodities.

On Thursday, the CCM Bull Market Sustainability Index (BMSI) closed again at 3,745, a level that continues to favor bullish outcomes over bearish outcomes. The CCM 80-20 Correction Index dropped down to 1,176, which historically points to favorable risk-reward conditions for risk investors looking out one-to-twelve months (see table below).

Risk Reward Ratios for Stocks 1983-2011

Notice the risk-reward ratio of 3.76, looking out three months, is the most attractive three month ratio in the table. This aligns well with the positive fundamental and technical developments we identified in late December 2010

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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