Gold and Silver Begins the Next Surge As Gold-Silver Ratio Peaks

The gold and silver markets have been experiencing significant volatility in recent months. This volatility is driven by technical factors, inflationary pressures, and geopolitical risks. As both metals are considered safe-haven assets, shifts in economic data and global uncertainties have a profound effect on their price movements. The gold-to-silver ratio is a valuable metric for measuring the relative performance of these two precious metals. Recent economic development after the release of US Producer Price Index (PPI) data has set the stage for a potential bullish continuation in gold and silver. This article continues the discussion from the previous article and explores how these factors influence gold and silver markets and what investors can expect in the near term.

Recap

In the previous article, the importance of the gold-to-silver ratio was explored. This ratio is a key metric that reflects the relative value between gold and silver and its correlation with broader economic conditions. The ratio tends to rise during periods of economic distress, as gold is viewed as a more stable asset, and falls during times of economic expansion when silver benefits from increased industrial demand.

Historically, peaks in the ratio have coincided with bottoms in the prices of both metals, offering valuable insights for investors. Several periods were examined where this correlation held, such as during the 1982 economic crisis, the early 1990s recession, and the COVID-19 pandemic, where the ratio peaked and signaled a turning point in gold and silver prices. Additionally, the technical analysis suggested that both metals exhibit bullish behavior when the ratio reaches critical resistance levels. The decline in the ratio from the resistance signals potential gains in gold and silver.

It examined how the gold-to-silver ratio remains a powerful tool for understanding market trends and forecasting future price movements. The alignment of technical factors with supply-demand dynamics points to a continued upward trend in gold and silver, with the potential for significant gains as economic conditions evolve. As discussed previously, the gold-to-silver ratio had been trading at a key level, indicating a possible bottom in both metals and signaling a potential breakout in the gold and silver markets. This analysis has been confirmed as correct, with gold reaching new record highs and silver bouncing back from its support level.

Gold-Silver Ratio Points to Continued Rally in Gold and Silver

The chart below presents the weekly gold-to-silver ratio and shows that the ratio was unable to break above the two-year downtrend line, initiating a strong drop from this resistance. This line has consistently marked a bottom for both metals when the ratio touches it. Notable examples of this resistance include the August 2022, March 2023, and February 2024 touches, during which both gold and silver bottomed and began strong surges. Now, the ratio is hitting this resistance line again, signaling bullish momentum for gold and silver. Gold has already broken record highs and is leading the market, while silver is also rallying strongly. As the ratio continues to drop, silver is likely to capture gold’s momentum and once again lead during the strong bullish trend.

The updated chart below from the previous analysis shows that gold and silver have initiated a strong rally as the gold-to-silver ratio peaked at the two-year trendline. The ratio reached highs of 90.70 and 89.58. It then began to decline, confirming a low in the gold and silver markets. Both metals are continuing to rally. The chart highlights the 2022 and 2024 lows in gold and silver, which were confirmed as the ratio peaked at the same trendline. This suggests that the gold and silver markets are poised for a significant upward surge.

The Projected Moves in Gold and Silver

As the gold-to-silver ratio has continued to decline, the gold market has reached new record highs, with prices breaking above $2,530 in spot gold following the release of US PPI data. The chart shows that the blue dotted trendline was broken a few days ago, and the price has continued to move higher within the ascending broadening wedge pattern. The strong consolidation after the breakout of the blue trendline suggests a price compression scenario, indicating that the gold market is likely to continue climbing. The first target for this rally is at least $2,700 to $2,800, determined by the ascending broadening wedge pattern shown in the chart below.

The chart below shows that the price has been consolidating after breaking out of the channel, indicating a price compression scenario, which reflects underlying price strength. The continuation of the upward move in the gold market mirrors the situation from March and April 2024. The RSI on the daily gold chart further supports this bullish outlook, as there is no sign of a market top at the moment, with the RSI currently well below overbought levels.

A similar situation is seen in the silver market, where a descending broadening wedge pattern has emerged. The price is approaching a strong resistance line around $30 to $31 in the spot silver market. A break above this range could pave the way for much higher silver prices, with an initial target of $50. The long-term trend in silver remains bullish, and this breakout would further build momentum in both the gold and silver markets.

Supporting fundamental

The above-discussed bullish strength in the gold and silver market is driven by the rising bets for a larger interest rate cut by the Federal Reserve and global geopolitical tensions. The expectation of a 50-basis point rate cut is seen as a reaction to easing inflationary pressures in the US, and this dovish monetary policy outlook generally boosts gold’s appeal as a non-yielding asset. As market participants increasingly expect looser monetary policy, the opportunity cost of holding gold decreases, pushing demand higher.

The Producer Price Index (PPI) data released by the US Bureau of Labor Statistics on Thursday indicated a weaker-than-expected rise in producer inflation, with the headline and core PPI falling short of estimates. The annual headline PPI rose by only 1.73%, and the core PPI increased by 2.44%, both pointing to signs of easing inflation, as shown in the chart below. Lower inflation reduces the pressure on the Federal Reserve to maintain high interest rates, making a larger rate cut more likely. This has reinforced market sentiment that gold, as an inflation hedge and safe haven, is well-positioned to benefit from the softer inflation outlook and possible rate cuts.

On the other hand, geopolitical risks in the Middle East and rising tensions between Russia and Ukraine have added further support to gold’s price rally. Israel’s recent airstrikes on Iranian-linked targets in Syria and the escalation involving Hamas and Hezbollah against northern Israel have fueled concerns over a broader conflict. Additionally, Russian President Vladimir Putin’s warning regarding Ukraine’s potential strikes inside Russia with Western-supplied missiles has escalated fears of NATO involvement. In times of geopolitical uncertainty, investors flock to gold for its safe-haven qualities, driving prices higher.

Gold remains on track for strong weekly gains as traders anticipate further confirmation of dovish signals from the Federal Reserve and continued geopolitical unrest. The combination of economic and geopolitical factors strengthens the bullish outlook for gold in the near term. The Federal Reserve meetings on Wednesday may increase the volatility in the short term. However, the overall trend remains upward and any price correction in gold and silver will be considered as buying opportunities.

Bottom Line

In conclusion, the gold and silver markets are showing strong bullish momentum, supported by technical and fundamental factors. The declining gold-to-silver ratio with the easing inflationary pressures and expectations of Federal Reserve rate cuts has created favourable conditions for continued upward movement in both metals. Geopolitical tensions have further amplified the demand for these safe-haven assets, pushing gold to new record highs and positioning silver for a potential breakout. With both markets poised for further gains, investors can expect continued volatility but also the potential for significant upside in the near term. While the gold market is on track to reach its long-term target of $3,000 as per detailed investigation, the initial target of $2,700 to $2,800 remains valid. On the other hand, silver is on track to reach the primary target of $50, and $32.40 is the key resistance to initiate the move to $50. Investors may consider buying both metals on dips.