Did the Gold/Silver Ratio Signal Risk Off?

Many have written about the gold/silver ratio as a leading indicator of risk and equity appetite (see here and here) so we won’t take your time explaining the relationship.   We do point out in our chart the speculative blow off and subsequent massive correction in silver without a corresponding move in gold has increased the gold/silver ratio by 35 percent in the 19 trading days since April 25th.   This is the largest percentage move in the ratio since the silver ETF (SLV) began trading in 2006.

Though the move, in part,  may be just correcting the froth in the silver rally it may also be signaling global risk aversion and flight to quality.  Note the big move in the ratio which began at the end of July 2008 several weeks before the financial crisis and collapse of Lehman Brothers.   The chart also shows the S&P500 continued to rally before turning down at the end of August.

Cross market indicators are often unstable, rarely unambiguous, and must be interpreted within in a larger context.   However, the spike in the gold/silver ratio coupled with confirmation from other risk indicators, such as Treasury yields, the Hang Seng, and the convergence of several macro swans increases the odds,  in our opinion, of a fairly sharp correction in the risk markets.

Note the data used in chart are from the corresponding ETFs and the ratio is inverted in order to more easily track the S&P500. (click here if the chart is not observable)