Silver/Gold may again be giving market cues

by Michael Tarsala, CMT

The good folks at Market Anthropology make the case that a reversal could come soon for risk-on assets.

For me, this is the key chart:

Source: Market Anthropology

It's the silver-gold ratio, one of many closely followed risk indicators. It has a long history of moving more or less in line with the S&P 500. As a result, extremes in the ratio and movements that run counter to the benchmark equity index can be telling about stock direction.

Here's why it works:

• Both silver and gold are precious metals, but silver is more closely tied to the economy relative to gold because of its industrial uses.
• As a result, silver will tend rise faster than gold when investors are optimistic about the economy.
• Conversely, gold tends to rise faster than silver when investors are pessimistic.
• The price of silver/gold, therefore, mirrors stock price optimism (the equity market) over time.

What the Market Anthropology folks are pointing out is a possible reverse head-and-shoulders pattern in the chart, marked by the "H" and the two "S"es.

You have probably heard of a head and shoulders pattern before, right? It's one of the most closely watched breakdown patterns.

A reverse H&S is the opposite. It's expected to play out to the upside. So if we do start to see a reversal in silver/gold, that should be a positive for the S&P 500.

Also of note, Market Anthropology sees similar reverse H&S patterns in other markets, including the Aussie dollar.

That one is more closely tied to natural resources stocks. So it may present a timing tool for when those assets could also see a reversal.

As always, contact us if you would like to discuss strategy, or models that may fit your investing goals. We like to talk.

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