Most investors have heard by now that gold (GCG26) has been on a tear for the last year. And silver (SIH26), its unruly little brother, has been tagging along for the ride.

But in recent months – since the April correction – silver (100% ytd) has outperformed gold (55% ytd). That could be because gold had gotten too expensive in relation to silver, and precious metal traders saw value in the grey metal. 

This chart shows the gold/silver ratio going back to 2000, and any spike above 100 in this metric has historically tipped the scales of buying interest toward silver over gold. As a matter of fact, this has been the case going as far back as when gold and silver futures started trading. 

But it does look like we are reaching a level in the ratio – 65.5% –  where gold might become more attractive, and silver may have reached a price peak. The 65.5 point of comparison represents a level of support to the price of gold not seen since COVID, when all metals started to rally. 

Over a long-term perspective, you can see this is "a line of best fit," meaning it encompasses many points of support and resistance.

(As an aside: one of my first jobs in the futures complex was a point clerk in the silver pits at the COMEX. I remember the big hubbub when gold/silver went from 50, which at that time was the standard, to 65 – now the “New Normal.”)

Here are my points: first, if you are long silver and have little or no exposure to gold, this drop in the gold/silver ratio presents itself as an opportunity to rebalance towards gold. If you believe gold as an asset is expensive, which it is in historical terms, it looks like it is actually cheap compared to its “brother.”

Second, this is not a prescription for an upcoming rally. As a matter of fact, both precious metals could fall in value – but if you listen to what the ratio is saying here, silver would likely fall faster than gold. (Which, in my experience, is a given.) But if metals resume their uptrend, then gold should retake its leadership role.

Currently, I'm overweight silver via the iShares Silver ETF (SLV) and call options spreads. I'm closing out my options which were set to expire next week, and am looking for a buying opportunity from gold. 

That could take the form of either a breakout from the current consolidation, or a pullback to the 4,130-4,075 area.

– John Rowland, CMT, is Barchart’s Senior Market Strategist and host of Market on Close.

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