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Everyone’s Buying Dollars

Gold and silver’s lower prices are not a sign the bull market is over. Instead, it is a sign that the US dollar is experiencing relative strength because other things are falling. For instance, the New Zealand central bank just finished off its biggest sale of the Kiwi in 7-years, but that is nothing compared to some other events, like protests for Democracy in Hong Kong, which is causing a selloff in the Hong Kong dollar and renminbi for US dollars. With more bullish news for the US dollar hitting the wires, it is uncertain when gold and silver will stop their slide.

Myriad speculators agree: silver is oversold. Traders and analysts point to a completely out of whack gold-and-silver ratio to explain this fact.

Overnight September 28 the gold-silver ratio was approximately 69.72. That means, for every ounce of gold, you could purchase 69.72 ounces of silver. At the end of August the ratio was 66. The ratio is above its 10-year average of 57.

This is a change from the usual.

Historically, the ratio has been much closer.

This measurement of how many ounces of silver are needed to buy an ounce of gold is a favorite indicator of how gold and silver are doing relative to each other among investors. As the ratio decreases, silver is outperforming gold. As the ratio increases, gold is outperforming silver.

Thursday of last week saw both metals reach longtime lows. The US dollar is at a four-year high, which is a lot of the reason why precious metals have had weak performances as late. The defining trend for precious metals is not what’s happening in the gold and silver ratio right now, but how the dollar is responding to international uncertainty. The dollar has hit a stretch of relative strength thanks to expectations the Federal Reserve will increase interest rates, but more important quantitative easing policies in Japan and in European Union bodes well for the dollar, alongside the above-mentioned turmoil in Hong Kong

The Comex December gold low of $1,206.80 an ounce is its weakest level in nearly nine months. The December silver low of $17.62 was a four-year low. With the gold-silver ratio hinting an oversold devil’s metal, Deutsche Bank is also predicting silver to fare better than gold, though it sees future weakness in both metals.

“However, the relative underperformance of silver may be set for a revival given the recent strength of U.S. growth indicators,” according to a recent report from the bank. “Indeed following the gains in the U.S. ISM (Institute for Supply Management) index, it would imply that not only has the S&P 500 further room to rise, but, that the decline in the gold to silver ratio may have moved into overextended territory.”

The bank also stated “we expect that the steady rise in the gold to silver price ratio over the past few years is drawing to a close and that short gold versus long silver is becoming increasingly attractive given the upside to U.S. growth indicators and the S&P 500.”

In the middle of September Reuters reported that silver holdings in exchange traded funds (ETFs) were at all time highs. Halfway through September, retail buyers were reporting increased demand after silver broke $19 last week. Whether or not this demand remained is unclear, though it is likely the it subdued despite a southernly-headed silver price.

One would also anticipate this to be bullish indicator for precious metals, but the US dollar is literally skyrocketing.

“The momentum of the dollar’s advance is unprecedented,” according to Société Générale analysts in a note Monday morning.

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