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Wednesday
May222013

Is the Gold & Silver ratio signalling an imminent sharp retreat in equities?

In general when equity prices are rising and credit spreads are tightening as is the case presently, the ratio of gold-to-silver prices falls as ‘fear’ ebbs away and confidence in a real economy returns as exemplified by the rise of risk assets.

Twice before we have seen the anti-correlation of stocks and gold/silver flip to a highly correlated regime, and as Bloomberg’s Chart of the Day notes, each time, it suggested that “stocks were due to snap”. It seems a concerted push above and a 50x ratio (for gold-to-silver) tends to exhibit notably risk-off behavior. Currently, the S&P 500 and Gold-to-Silver ratio have been highly correlated since this last rally began in stocks and as HSBC’s Charles Morris notes, this suggests a ‘snap’ in risk assets within six months.

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