Long term View of the Gold/Silver ratio

You will note on this chart that since Silver peaked near $50 back in April of last year, gold had generally been outperforming it for the remainder of the year. I am of the opinion that this was due to the anticipation of the end of QE2 in June of last year. Traders began preparing for the loss of the liquidity being supplied from that front. When you couple this with the fact that European sovereign debt woes began to gain ascendancy in the minds of traders worldwide, it is easy to see why gold held up better than silver. DEFLATION was back in; INFLATION was out.

If, and this is a big "IF", traders become convinced that deflationary forces have been left behind, then the environment in which the grey metal will outperform the yellow metal is created. In such a case, this ratio will begin trending LOWER as silver outperforms.

Every single bit of this is dependent on the attitude of traders towards risk, which is simply another way of saying whether they are leaning more towards improving global growth prospects and inflation rather than slowing global growth and deflation.

Stay tuned as the environment is still very volatile. For this week at least, the inflationary (risk trade) forces have won the battle.