Gold Shines, But It Might Need Silver To Validate More Gains
Gold takes off to the upside.
The dollar is making gold more precious.
Silver has not participated, yet.
The silver/gold ratio is creeping higher - a danger signal?
Silver - always expect the unexpected.
At the beginning of December gold was under intense selling pressure. The dollar was mounting an attempt at a recovery, and the historical inverse relationship between the U.S. currency and the yellow metal caused longs to head for the exit and some trend-following speculators to establish short positions. Additionally, as the third twenty-five basis point interest rate increase of 2017 by the U.S. Federal Reserve approached, the prospects for price appreciation in gold began to look less attractive.
In the final months of 2015 and 2016, gold had put in what was becoming a seasonal pattern of lows and during the first two weeks of the final month of 2017, the pattern repeated. Gold fell to a low of $1236.50 per ounce on the day that the U.S. central bank moved to push the Fed Funds rate to 1.25%, but in the aftermath of the announcement, it began a recovery that continued into January. Just one month after the yellow metal was staring into a bearish abyss, it now it is approaching some critical resistance levels on the upside and gold is back on a bullish path. What a difference a month can make in the world of commodities.
Gold takes off to the upside
Gold found its low in the hours before the Fed increased the Fed Funds rate and it has not looked back. 
Source: CQG
Since December 12, the price of the yellow metal has moved $104 high and traded to a high of $1345 level on January 16. Gold posted a gain for five consecutive weeks as it approaches the two critical resistance levels from the past two years. In 2017, gold reached a high of $1358.50 per ounce which is less than $15 above last week high. Above there, the 2016 high at $1377.50 stands as a line in the sand for the precious metal. Gold reached that level in the immediate aftermath of the Brexit referendum, but now it is starting to feel like that high is a magnet for the yellow metal. Gold is finding support from the currency market these days as the value U.S. currency continues to slip compared to other foreign exchange instruments.
The dollar is making gold more precious
The long-term historical inverse relationship between the dollar and commodities prices has provided solid support for the price of gold over the past month. The dollar had a feeble attempt at a rally in early December that took the dollar index to just over the 94 level, and since then it has made a new low and is working its way towards 90 for the first time since 2014. 
Source: CQG
As the weekly chart of the U.S. dollar index futures contract illustrates, the dollar traded to a new and lower low at 89.96 on the active month March futures contract on January 17 and 19 last week where there is now a short-term double bottom. The greenback index has declined below all areas of technical support dating back to 2014, and that has been good news for the price of gold as the precious metal could be preparing to vault higher. However, gold may be waiting for one last signal from its little brother before it takes off to the upside.
Silver has not participated, yet
When he was alive, my grandfather did not call the change in his pocket coins; he called it silver. Gold and silver have long histories as currencies or means of exchange. Gold was the equivalent of bills and silver the coins. Before 1965, U.S. quarters were 90 percent silver. Over the past fifty years, copper, nickel, and other metals replaced silver in the U.S. currency. However, the relationship between gold and silver dates back to around 3000 BC when the first Egyptian Pharaoh Menes declared that two-and-one-half parts silver equals one part gold. Menes' proclamation was the first recorded acknowledgment of the silver/gold ratio as a measure of value between the two metals.
Silver is a more speculative precious metal because it has a lower per ounce cost which makes it tend to move more on a percentage basis. Silver has a long history of producing fantastic profits and even more extraordinary losses for speculators because of its penchant for price volatility. The Hunt Brothers and many others throughout history have made small fortunes from big ones in the silver market. The most recent foray into silver by a high-profile investor came in the late 1990s when Warren Buffett made a couple of hundred million from a 125-million-ounce silver long position. Buffet left plenty of money on the table as he entered the position around the $5-$6 per ounce level in 1996 and the price rose to north of $49 in 2011. Even today with silver trading at around $17 per ounce he sold too soon.
Over recent months, silver has not been able to rise above $17.50 per ounce which stands as a formidable technical level for the precious metal.
Source: CQG
As the weekly chart shows, silver has been making lower highs, and since September it has not traded above $17.50. Like gold, silver fell to lows in mid-December when the price fell to a low of $15.555, but it has come storming back and on Monday, January 15 it reached a high of $17.45 per ounce. Price action in silver has been tame compared to gold which is currently just $42.50 below its 2016 high. At the same time, at $17.03, silver is $4.065 off its peak price that followed Brexit in 2016. Gold may be waiting for a final signal from silver before it scales technical resistance and the price moves towards $1400 per ounce for the first time since 2013.
The silver/gold ratio is creeping higher- A danger signal?
The long-term modern-day average for the silver/gold ratio stands at around 55:1 or 55 ounces of silver value in each ounce of gold value. 
Source: CQG
As the quarterly chart of the relationship displays, it has traded in a range from lows of 15.47:1 in late 1979 to a high of 93.18:1 in 1990. The median stands at 54.325. It is fair to say that when the inter-commodity spread between the two precious metals stands above the median silver is historically cheap compared to the price of gold, and when it is below it is expensive. The last time silver was expensive was back in 2011 when both metals were on highs with gold at just above $1920 and silver at $49 per ounce.
On Friday, January 19, the ratio stood at 78:34:1 and silver is historically cheap, or underperforming price action in the gold market. The silver/gold ratio is close to the highest level since 1993 as $17.50 has proved a difficult price point to conquer for the precious metals. The current level of the price relationship should give gold bulls a reason to pause and curb their bullish enthusiasm. However, one thing I have learned about the silver market since 1980 is that conditions can change in the blink of an eye. Silver could be preparing to attack $17.50 and if it climbs above that level, watch out because all hell could break loose.
Silver - always expect the unexpected
Silver can be the most volatile metal in the world, and when trend-following speculators and those looking for higher prices descend on the silver market, it can take off like a rocket ship. The price action in silver has been sedate since it reached just over $21 per ounce in 2016. Even though silver has not traded above $20 since September 2016, it still traded in a $3.505 range last year with lows at $15.15 and highs at $18.655. Given my experience in the silver market, a move above $17.50 could mean an attack on $18.655 in a matter of days. I have learned a lot about the silver market and its liquidity over the course of thirty-eight years of trading and watching the daily patterns in the silver market. Perhaps the most significant lesson is that when it comes to silver, always expect the unexpected. Right now, few market participants are projecting a substantial rally in silver which could mean this is the perfect time for an explosion in the price of the metal.
I believe that gold is heading for a test of the 2016 high, but it will be silver that validates the move over coming days and weeks. Silver is currently sitting at a price point that could turn out to be a launch pad for its price and the prices of gold and many other commodities. Gold has become a lot more precious over the past month, but it will be silver that rallies a lot more on a percentage basis if the 2018 bull in precious metals is for real. For those who wish to position for an eventual comeback in silver, SLV is the unleveraged silver ETF vehicle that does a reasonable job replicating price action in the silver futures market.
Source: CQG
As the chart dating back to 2006 highlights, SLV has been consolidating since the 2016 high and it is a lot closer to the low over the past decade than the high. Silver could be holding the key to the path of least resistance for the gold market these days, but the yellow metal continues to display lots of strength with the dollar sitting near lows.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.