Silver price witnessed one of its worst single day fall on Friday. The price of the commodity is witnessing a free fall since then. The global spot silver price, currently trading near four-year low $17.78/ounce, tumbled 3.8 per cent on Friday alone. For the week, it was down 4.3 per cent for the entire week.

Similarly, gold ($1,216/oz) price is also under pressure. The yellow metal was down 1.1 per cent last week. Increasing concern about an impending interest rate hike in US appears to be pulling investors out of gold and silver. The sharp fall in both the commodities has taken the gold-silver ratio higher by 3.3 per cent last week.

What is this gold-silver ratio? It is the ratio obtained by dividing the price of gold per ounce by the price of silver per ounce. The resultant value gives the amount of silver required to get one ounce of gold. That is, if the gold-silver ratio is 50, it means that 50 ounce of silver is required to get one ounce of gold. This ratio is currently poised near 68.7. It is also a good indicator to gauge the direction of the gold and silver price.

Interpreting the ratio

In general, the ratio always moves in the direction opposite to gold and silver prices. That is, when the price of gold and silver falls, the ratio goes up and vice-versa. Also, though gold and silver always move in the same direction, at times of a price fall, silver tends to decline at a faster rate compared to gold. This results in a surge in the ratio whenever silver prices fall since silver occupies the denominator spot in the ratio. Last Friday’s fall is a clear example of this when silver tumbled 3.8 per cent while the gold price was down just 0.8 per cent on the same day; the ratio shot up a whopping 13 per cent on Friday.

On the charts

The sharp rise in the gold-silver ratio last week has turned the picture bullish for the ratio on the charts. Immediate support for the ratio is at 68.26 and the key short-term support is at 67.15. Friday’s sharp rise has left less probability for the ratio to fall below 68 immediately. As such while the ratio remains above 68, a rally to 70 and 72 looks likely in the coming days.

Now what does this mean for the gold and silver price? Looking back at the history, in most occasions, the ratio has always shot up sharply due to a fall in the gold and silver price. Since the outlook is bullish for the ratio to target 70 and 72, there is a strong probability for the gold and silver prices to extend their fall in the coming days. Technically, gold has resistance at $1,240 and can fall to $1,200 and even $1,185. On the other hand, silver has resistance at $18.6 and can fall to $16.6 in the coming days.

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