July 13, 2009 – I noted in the last commentary, the importance of resistance for the gold/silver ratio at 69. I even drew a red horizontal line at that level, which can be seen again on the accompanying chart. I also warned: “We simply have to stay alert for the possibility of a deeper correction.”
Unfortunately, a deeper correction is what was handed to us. The recent weakness in silver caused the ratio to break above the 69 level. Thereafter, the ratio has now climbed back toward – and almost touched – its 200-day moving average, which is currently at 72.5.
This moving average is starting to roll over. I therefore do not expect the ratio to break above it. Also, the important double-top in the low 80s is formidable, which adds to the bearish look of this chart pattern.
I therefore expect the ratio to begin falling once again, meaning that silver will be outperforming (i.e., climbing more rapidly than gold). Consequently, traders can again sell the ratio. I recommend selling the ratio (buy silver and sell an equal dollar value of gold) at the market (today’s close for record keeping). Stop-out this trade on the first close in the ratio in New York above 74 or 4% above your sale price, whichever is lower.
My objective is to share with you my views on gold, which in recent decades has become one of the world’s most misunderstood asset classes. This low level of knowledge about gold creates a wonderful opportunity and competitive edge to everyone who truly understands gold and money.
