$Gold/$Silver Ratio Weekly

An inadvertent buy signal is flashing for GBN.V on the Gold/Silver ratio. The Gold price has been advancing steadily against the Silver price as liquidity comes out of the markets. But what that should mean is liquidity is coming out of stocks as well.

The inverse correlation of GBN.V with the Gold/Silver ratio suggests that since at least the beginning of 2006, after the conservative government de-regulated the commercial banking sector to allow derivatives trade, GBN.V as a stock traded inversely against the gold/silver ratio.

The means the stock is being viewed no differently than say, any other small cap commodities play. That is to say, its not being considered as a producing gold mine, but a lifestyle play for insiders as they line their pockets with proceeds from the market.

In this uncertain market, GBN.V might trade sideways since gold prices are likely to rise, but commercial traders are anxious to paint the tape and make gains on their ill-gotten short sale gains. One thing that might drive GBN.V shares is a decline in treasury prices here, though I wouldn't hold my breath on that one.

You can see where the inverse correlation has pointed out the bottoms of the stock, last December should have been the very bottom, though further shorting occurred in the spring.

By shorting, I mean traders are using delta hedging strategies based on the Black Scholes options pricing model, where money coming into the stock is taken and parried against long dated U.S. treasuries futures.

GBN.V may eventually snap the strong inverse correlation with treasuries by advancing along with gold prices, as it had for brief periods, such as end of 2008 - 2010. Of course, if treasury prices decline at the same time, this would bonus the stock.

The outcome is difficult to forsee at this point, mostly due to the depth of concern over the Eurozone, and the Fed decision on interest rates and QE which comes tomorrow. Certainly GBN.V has traded sideways for a couple of weeks' time at the same price level, and can continue sideways here.

According to the chart, it takes a few weeks' time before prices are ready to move higher, but definitely carving out the lows as it had in December, 2011.

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-F6