Gold/Silver Ratio & USD: 2 Horsemen to Ride Again?

A concurrent rise in the Gold/Silver ratio (GSR) and US dollar can be a bringer of death and destruction to the macro, after it wipes out the precious metals, commodities and the global areas comprising the ‘anti-USD’ trades that have been in effect since 2016.

The Gold/Silver ratio has not worked well as such an indicator for several years and I think that is largely due to extreme Central Banking and its monetary policy distortions that have known no bounds. But also consider just how out of whack silver got into the spring 2011 blow off amid runaway inflation hysterics. Cue Bill Gross famously short the long bond right at the bottom (top in yields). It could be as simple as silver needing a lot more work to get back in line after that blow off.

A brief clip from an extended segment from NFTRH 515 reviewing the 3 Amigos (SPX/Gold Ratio, Long-term Yields & Yield Curve) and reintroducing the 2 Horsemen

So here we have the GSR rising toward a new high while USD tries to manage a bounce. Is the GSR leading USD higher into a coming liquidity contraction of the ongoing asset mania? Considering that beyond the short-term questions of USD’s bounce vs. pullback scenario, it probed major long-term support from January to April of this year and is therefore a candidate to resume its cyclical bull market that began in 2011.

The green shaded area shows the post-2011 environment when the GSR and USD correlation stopped working as it traditionally had, as US stocks rose. This was a period of global deflation and US Goldilocks. But in 2016 we elected a fiscal policymaker (on steroids).

Say what you want about Trump (and I sure do say a lot of negative things), but fiscal policy is ironically saner than the out and out monetary magic tricks that the Bernanke Fed had employed. For instance, Trump’s play is reflation and for that a weak currency is optimal. But what if the currency – the world’s reserve currency – were to rebel and become chronically strong? In a fiscal reflation, would Goldilocks again carry the day or would a strong USD kill said reflation?

If these two horsemen resume their traditional functions the GSR is pointing the way up for Uncle Buck at this time. It would not be good for large chunks of the economy.

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