The markets have been in turmoil since Friday. The Nikkei fell more than it did during the nuclear disaster, the COVID-19 shock, and the 2008 crisis. US stock traders are pricing in hard landing scenarios and talking about emergency rate cuts. While markets react quickly and enter panic mode, this often creates good trading opportunities for patient traders. One such opportunity is a pair trade idea between gold and silver.
(XAUUSD and XAGUSD Daily Chart)
2100 for gold and 26 for silver were hard resistance levels for months. When gold broke the 2100 resistance, silver was unable to surpass 26 for some time. However, after gold’s breakout, the upward momentum was so strong that silver eventually followed, but it remained much lower relative to gold. The negative divergence of silver ended in May when silver made a massive run from 26 to over 32. This move was so significant that it changed the negative divergence to a positive one, and then it returned to average at some point. This process created two low-risk pair trade opportunities.
(XAUXAG Daily Chart)
Since 2022, the gold/silver ratio has averaged 83.82, waving around the average. The waves mostly stayed within plus and minus 2 standard deviations, creating many opportunities. In one of our previous articles in April, we shared this possible pair trade opportunity with our viewers.
Now, the gold/silver ratio has hit 1.5 standard deviations. Growth fears are putting more pressure on the more industry-heavy metal, silver, relative to gold. Meanwhile, Middle East tensions are affecting gold more positively. During the margin call panic after the massive selloff in stock markets, silver was more heavily affected due to its relatively lower liquidity. This negative divergence against silver might correct itself after the panic subsides. The correlation between gold and silver over the past two years is 85%. Unless something fundamentally changes to alter this long-term correlation, these divergences might create pair trade opportunities between silver and gold by opening a long position in one and a short position in the other using the same position size in dollar terms. This time, silver’s potential looks better than gold, as long as the long-term fundamentals remain unchanged, but traders might need some patience about the timing.
