Economic Analysis: As Silver Goes Cheap, Gold Becomes Expensive

Gold buyers were happier yesterday as the precious metal seems to have hit a bottom and moved a tad higher. The technical analysis of gold will support a move higher, as we have avoiding hitting a new eight month low. But, have we hit rock bottom yet?

I think gold will move lower and here is why.

Right now traders might want to really consider whether or not they should switch from short to long positions. We have a key support near $1,180 an ounce, December 31 low, and while trading at these current levels, we will revisit this level. If that happens we could hit multi year lows near the $1,050 level.

Many of the precious metals, like silver, are struggling near multiyear lows right now. Silver lost almost 6.5 percent of its value on Friday. Monday, we saw a small recovery. The gold to silver ratio, at 68.7 to 1, a four year high, is a signal that gold will start to decline again. The median ration, traders look at is nearer 50 to 1 or 55 to 1. Right in that area. With the ratio well above the historical average we can conclude a couple of things here. First conclusion, silver is cheap. Second conclusion, gold is expensive. Silver broke below the support at $18.50 then the key $18 per ounce level on Friday. What does this mean? Gold is too expensive when in relation to its little sister Silver.

Let us look at another precious metal for just a moment, platinum. The premium platinum enjoyed over gold has fallen from a high at $222 per ounce to less than one half that number at $110. This shows us the strength of gold and the weakness of silver.

Another reason why we should be worried about the price of gold is quite simple. Look at the ever increasing strength of the almighty buck. That’s right folks, the U.S. Dollar continues to gain steam and that will weigh on the short term price of gold as we go forward. The dollar strength has not been good on commodities in general.

This does not mean we should remain forever bearish on the yellow metal. Look at the support near $1,050 to hold and be a good time to possibly enter long trades into the market. As always, we monitor, as should you, global events and news before making decisions. You can never tell when something will happen to drive investors into safe havens. The biggest safe haven remains gold.