Elliott Wave InternationalmyEWISocioniomics.Net
Home > U.S. Economy

The Gold/Silver Ratio Shows Investors' Rapid Flight From Risk
EWI's July Financial Forecast reveals how the 30% sell off in May fits into the bigger picture

By Nico Isaac
Fri, 01 Jul 2011 15:00:00 ET
Add to Facebook Add to Twitter Email to a friend Printer Friendly

I finally broke down last year and joined Facebook, the world's largest social networking website (or, as my 80-year old step-aunt calls it, "The Face Page"). Facebook users create their own personality profiles, upload photos, announce events, and most importantly, search for long-lost or new-found acquaintances to "Add" to your "Friends" column.
 
In turn, a very special weekly (or daily, or hourly) Facebook dialogue ensues: New friends "tag" you in pictures, write on your "wall," "poke" you to say hello, and "like" comments you've posted to your home page.
 
So imagine that the collective US financial community had its very own Facebook page. And then imagine that the following news feed appeared under Recent Activity: "US Investors are now friends with Risk." You better believe there'd be as many "Likes" and "Thumbs Up" in reply to this status update as to a shirtless photo of Brad Pitt. The reason being: A risk-taking public is the lynchpin to keeping a rising market afloat. Confidence inspires investment while its opposite fear is to liquidity what a boa constrictor is to a bunny. 
 
To illustrate this phenomenon, Elliott Wave International's May 6 Short Term Update presented the following close-up of the Gold/Silver Ratio since 2006.
 
 
This index is a time-honored measure of the collective risk-appetite among investors. Simply put, it gauges investors' preference for the relative safety of the yellow metal by dividing the price for one ounce of gold (x) over the price for the same amount of silver (1). A rising ratio signals a growingly fearful public. A falling ratio signals a growingly fearless one.
 
You can see that over the past five years, each meaningful upturn in the ratio has coincided with a major market peak: 2006 real estate, 2008 commodities, 2009 financials, and in 2011 a potentially meaningful top in gold.
 
Flash ahead to the brand-new July 2011 Elliott Wave Financial Forecast. There, our analysts present an updated chart of the same measure (albeit, inverted) alongside this powerful insight:
 
Over 13 trading days (from an intraday high on April 25 to an interim low on May 11) the gold/silver ratio experienced a 30% sell off, indicating a "rapid flight from risk." Also, "the turn away from risk did not trigger a major rally in gold."
 
Bottom line: a new "status update" is clear: Investors have unfriended Risk.
 

Rating: - based on [20 rating(s)]
Rate this content:
  
 


FFS"The clarity of your thoughts is so powerful that I typically read an issue at least a half dozen times." - R.N., Financial Forecast subscriber

The Elliott Wave Financial Forecast is a rational voice in a volatile marketplace with an unrivaled record of providing tomorrow's news today.

It helps you take control of your investments and anticipate the larger trends that most investors don’t recognize until it's too late.

Preview the latest Financial Forecast now>>

Free 50-Page eBook


Learn to Think Independently

The Independent Investor eBook can help you to challenge conventional notions about investing and explain market behaviors that most people consider "inexplicable."
Download your free Independent Investor eBook


© 2014 Elliott Wave International

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.