Gold-Silver ratio on the way down – same setup as 1989-03

Fear is starting to become a problem, he says Chris Vermeulen by The Technical Traders.

Traders are beginning to see that inflation, CPI, PPI and global currencies are reacting to the sudden change in course by the US Federal Reserve and global central banks. This fear is also reflected in the gold-silver ratio.

My research suggests the closest comparison with the current gold (GC=F) and Silver (SI=F) setup can be found by looking at US markets from early 2000 through 2003. Let’s examine this setup a little further.

Gold to silver ratio peaks above 1.2 during Covid crisis

For the last five years gold has consolidated from 2017 due to the covid virus event. This consolidation leads to an extreme high in the gold-silver ratio to levels above 1.2. The only other time in history when the gold to silver ratio reached levels above 1.2 was in 1991-92. This corresponds to the collapse of the Soviet Union.

This extreme spike in the gold to silver ratio marks a very weak silver price relative to gold. Psychologically, this represents a very real lack of fear in relation to global currencies/economies. The danger of extreme inflationary tendencies.

Now that inflation has suddenly become an issue towards the end of 2021, the gold to silver ratio has moved decidedly lower. This shows that silver is recovering relative to the price of gold as fear begins to mount around the world. Traders, consumers and others are dumping assets into precious metals near recent price lows to hedge against uncertainty, inflation and currency depreciation.

The fall of the Soviet Union was a global catalyst event – just like Covid

The collapse of the Soviet Union led to a global shift in perceptions of global currencies, threats, and opportunities. It also ushered in a new wave of capitalism across Russia, triggering a massive credit/economic expansion phase that accompanied the birth of the Internet in the early 1990s. Because of this, we see the gold price level remaining rather subdued from 1989 to 2002-03. It was a time of very little fear when global traders were chasing deals, dot-com stocks and real estate instead of precious metals.

After the dot-com bubble burst and the September 11, 2001 terrorist attacks shook global financial markets, fear and precious metals suddenly came back into focus. The rally that took place in gold after 2001 resulted in a nearly 600% surge (from $260 to $1923). Most of this rally took place after the 2007-08 global financial crisis.

Is today really anything different from 2000~2002?

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The similarities seem too obvious to ignore…

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I believe that there is likely to be a sustained decline in Crude Oil through the end of 2022 as well as a sustained strengthening of the US Dollar. Meanwhile, gold is trying to climb back to recent highs. The catalyst for the breakout rally in gold and silver will likely be a prolonged collapse in US/global financial markets and stocks or a new war/aggression that will draw the US/EU into conflict.

Overall, I believe global currencies will continue to retreat due to risk/depreciation factors related to inflation and disruptions in the global economy; very similar to the end of the Soviet Union in 1991.

In my view gold will try to hold above $1700 as basic support while silver will try to hold above $19.00 as basic support. Any major crisis event, war or global financial crisis could result in a retest of these base support levels within the next 12+ months.

If Gold/Silver repeats a setup from 2002-03, what can we expect in the future?

Then the breakout trend in gold begins, which could happen as early as 2023 or 2024. I believe gold’s next rally target will be somewhere above $3100. Then we start a committed climb to levels above $4500 and above.

It’s difficult to predict target dates for this type of rally, but I’m trying to illustrate what I’m seeing in terms of the similarities in market conditions from 1989 through 2003 to what I’m seeing now. If you lived through this incredibly exciting time, you may remember many of these events. I’m suggesting that maybe we’re starting to move through similar events now, and I suspect we’re somewhere around August 2000 now.

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