Dorothy's Silver Shoes and the Gold-to-Silver Ratio Fallacy

The gold-to-silver ratio might move above & beyond 100 before silver makes any significant progress. Here's why...

by TraderStef via CrushTheStreet (connect with TraderStef via Twitter or at TraderStef's website)

In 1939, the "The Wizard of Oz" depicted Dorothy being swept away from her family farm in Kansas to the magical Land of Oz by a tornado. During her journey, she makes a few new friends to help find a wizard that can supposedly return her home and provide her friends with what they desire the most.

Few are aware that in the original book from 1900, "The Wonderful Wizard of Oz" by Frank Baum, Dorothy's slippers are made of silver, not red rubies. The entire book served as a political allegory for gold and silver's battle to become the primary American currency in the early 1900s. During the late 1800s, the U.S. was on a bi-metallic standard and the ratio between the two stood at 15. The gold-to-silver ratio (GSR) was such a big discussion point at the time that it became one of the underlying themes in Frank Baum's book. The GSR represents the number of silver ounces it takes to buy an ounce of gold. If the gold price is $1,500 per ounce and the silver price is $15, then the ratio between the two would be 100.

Dorothy initially followed the yellow brick road (the gold standard) to find her way back home but eventually discovered it was a path to nowhere and the silver slippers (silver standard) would get her back home. The political symbolism was abandoned in the movie and the silver slippers were switched to ruby red shoes. The red color juxtaposed against a yellow road emphasized the advance in filmmaking from black-and-white to Technicolor through the Land of Oz.

The most significant difference between the movie and the original book is that in one, Dorothy is only dreaming, and in the other, she really travels to the Land of Oz. The movie portrays the story as a dream with family and friends in her life showing up as characters in the storyline. The book, on the other hand, leads the reader to believe that Dorothy's journey is real and everything actually happened. Instead of a dream, the Land of Oz is a magical place that really exists somewhere over the rainbow.

GSR pundits remind me of Dorothy's dream vs. the real tornado that knocked her out and then she realizes it was only a dream to be a time-traveling bottom and top picker in a land of cotton-picking dreamers.

The Golden Cross Returns in Gold... "One item in particular I would like to put to rest at this time is the gold-to-silver ratio. When I decide to fill up my heating oil tank or car at the gas station using fiat currency as a medium of exchange, the price ratio between kerosene and gasoline is not a consideration. One example of that ratio uselessness is when the price of silver rocketed to its high and collapsed six months prior to gold making its high in 2011. Ratios are a nice talking point to fill an analyst's time. A price, trend, pattern, and low-risk position timing are not determined by an after-the-fact metric. If you feel a need to elaborate on whether the chicken or the egg came first (it was an "egg," by the way), do not waste your precious time with ratio chit-chat while learning fusion analysis trading and investing." - TraderStef, Jan. 2019

Logo Tiggre, founder and CEO of Louis James LLC opines on the GSR - KitcoNews, Mar. 2019

There are dozens of variables that contribute to the GSR at any given point in history and any attempt to ferret out the exact reason behind every wiggle takes away the focus from what is happening on the gold and silver charts right now. If I had to choose one underlying variable that has a direct influence on the price of silver besides a manipulation ghost, it is that the industrial uses of silver far outweigh those of gold.

Based on data supplied by the Silver Institute's 2019 World Silver Survey, industrial demand accounted for 57.5% of silver in 2018. That lopsided metric outweighs any of silver's monetary attributes in our contemporary, fiat-centered monetary system.

The world is currently experiencing an economic slowdown, and that fact lessens the demand for silver and contributes to a low or stagnant price range. Global trade has plunged over the last two years and manufacturing and construction have already entered a downturn. A plunge in the service sector is one of the last dominoes left to fall and could lead to a full-blown global recession. Global manufacturers reported that new export orders fell for a tenth month in June and are the most widespread decline in six years. The U.S. has weathered the global slowdown relatively unscathed, with the exception of our sovereign debt level, but growth in manufacturing and construction are beginning to stall. Overall, global growth is probably too weak at this point to absorb any major shocks without plunging the world into a more serious downturn..

Silver vs. gold-to-silver ratio monthly chart as of July 5, 2019 close...

Silver is into its ninth year of a correction. I have been reading articles and listening to interviews ever since 2013 that said the silver price was at its low and bottom due to the GSR. There is no doubt that the price of silver is currently trading within a tight range near its average cost-of-productionand is in the process of bottoming since early 2016. Due to the deterioration of the global economy and a rising gold price on the heels of monetary policy madness, the GSR could rise to 100 or beyond before silver makes any significant progress in breaking out from its bear market. If history is any guide, gold rallies first, then silver eventually follows.

There are numerous anomalies to point out on the chart above, and I have chosen three to highlight in today's analysis. The first is where silver put in a $4 low in 2001, and then it traded within a $1 range for two years as the GSR soared 20 points. The second is 2009-2010, when the price of silver nearly doubled and the GSR was stuck in a 10-point range. The third is 2019, where the price is slowly rising within a $2 range as the GSR has spiked more than 10 points. Lastly, take note of the red arrows where the price was trading at the 2016 low - that is the same price point as the May 2019 low, but the GSR is now almost 10 points higher than it was at the 2016 low in price.

Since the lows in late 2015, I have noted on numerous occasions that the only price that matters in silver right now is the $21.49 Fibonacci level. That was the breakout point that catapulted silver to its 2011 high and has been the resistance level to beat since early 2014. When $21.49 is taken out with conviction in price and buy volumes, that will likely be the sweet-spot opportunity everyone is looking for.

Ten Years Gone - Led Zeppelin

Plan Your Trade, Trade Your Plan

TraderStef on Twitter

Website: https://traderstef.wordpress.com