The Gold/Silver Ratio is commonly misunderstood, so I will attempt to shed some light on this very important indicator.
The GSR tells of 4 typical scenarios that are possible, 2 for a rising GSR and 2 for a falling GSR:
A rising GSR is caused by gold performing relatively better than silver, wether both are in a down trend or uptrend. Typically an upward move in GSR is driven by deflation or threat of systemic financial upheaval, or mix of the two. In deflation gold and silver will move down in tandem, but typically silver falls faster that gold, thus the GSR increases. With systemic financial upheaval (defaults, downgrades, bank failures, ect.) Gold can increase substantially, as paper takes flight to quality, but silver can lag as growth concerns pop up. This scenario will also cause GSR to rise.
A falling GSR is caused by silver performing relatively better than gold, wether both are in an up trend or downtrend. Typically a downward move in GSR is driven by inflation or improving economic and financial conditions or mix of the two. In inflation silver and gold will move up in tandem, but typically silver rises faster than gold, thus the GSR decreases. With improving economic and financial conditions, gold may continue to fall as hedges are unwound, but industrial demands for silver may support the price of silver sooner, this condition would also cause GSR to fall.
There is a 5th scenario that can happen during an extreme increase in the price of gold. If gold moves to a point where it basically out prices itself, and physical gold becomes difficult to find, silver at that point will perform as 'poor man's gold' and will basically cause silver to chase after a dramatic upswing in gold price, as a massive rush to physical will drive up the relatively cheaper silver price. GSR can explode to the downside in such cases, as long standing historical ratios of 1:10 to 1:16 can be reached.
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