Silver/Gold Ratio

The silver vs. gold ratio reversed on the 27th December, 2010. If the indicator of the ratio between gold and silver were true to expectations, then very possibly in the three weeks following the reversal, a correction ensues in the markets.

That would make for an interesting week, starting Monday.

The problem with the ratio of gold vs. silver is that, as an indicator, it has been very choppy and can reverse weeks, sometimes months in advance. It is presumed to indicate how credit markets are deteriorating.

The silver/gold ratio worked well in spring of 2004, calling the market according to its rule of thumb. However, the silver/gold ratio preceded the market top in February, 2007 by at least six weeks. Considering that we saw a top in the silver/gold ratio in December, 2010, and that the same had occurred in December, 2006 before the top of the market, then it could very well be that the top of the market will be in shortly. The ratio has called both the top and the bottom of the market, whatever the interval.

In terms of Canadian money market rates, the three month treasury rate has come off a couple of points while the three-month corporate rate has risen. There have been calls for raises in rates, but the three month treasury bill rate hasn't risen.

What it does show is that inflation dominates the markets, if anything and that we are in an inflationary spiral, and have been since June, 2010. This is interesting, because the discount rate saw near zero that summer, and repo's and swaps could very well have had negative rates at the time, but the situation reversed with fresh supply of extremely short term paper.

How will this affect GBN.V shares? Should sell-side brokers have to settle their accounts because they first sold millions of shares into the market, issuing you an I.O.U., taking your money and investing it in a mania stock, it could very well be that they will be obliged to divest their holding and repurchase. And anywhere that leverage is applied will have to be settled immediately.

There is no magic, here. GBN.V shares could also suffer the equity decline as well. But since GBN.V shares performed during the flash crash, they may perform again. Even so, should the sell side broker be able to decline the stock to 38¢ level, their overall account is still in the red, as they sold shares at a much lower level for an extended period of time.

A lot would depend on how bullion prices fare in the next couple of weeks.

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