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Must-See Charts: The Gold/Silver Ratio

NEW YORK ( TheStreet) -- The gold/silver ratio is something I watch closely. This ratio has been on the move in recent weeks, and in my opinion could have further upside to go.

Now, many people reading this article have likely seen what the precious metals markets have been through in recent weeks. There are many potential reasons for the huge selloff we saw in gold and silver. These reasons range from simple large hedge fund liquidation to investors wanting to chase stocks to the usual conspiracy theories.

I am not here to speculate on what caused the drop, because for my purposes it doesn't make any difference. What I am here to try and do is find solid trade opportunities based on price action, not what I "think" the market might do.

As I have discussed previously, I think the price action in gold and silver following the plunge has been constructive; however, there is a lot of work left for the bulls. I think many people have been disenchanted by the recent selloff and perhaps are turning their backs to some potentially good trade opportunities. Looking at the precious metals, I think the gold/silver ratio could provide such an opportunity.

Courtesy of QST

From what I have seen, demand for physical metals has remained quite robust even though prices were melting down. In my opinion, it is this physical demand that has caused the metals to stabilize.

In fact, I personally have a hard time imagining the metals falling a whole lot lower from here as central banks continue to print money to boost their economies (the Bank of Japan, for example).

That being said, I want to focus on what the chart is telling me. After all, fundamentals don't pay -- price does. In this case, it appears to me that this ratio has staged a clean break out of the previous trading range and could potentially trade at higher levels.

Now there are different ways to play this ratio, with a straight futures spread being the simplest in my opinion. Every trader is different and such decisions should be made based on a trader's account size, risk tolerance, and trading style.

I believe the potential is there for a move higher in this ratio of several dollars. Please feel free to contact me with any questions you may have or to structure a trade for you based on your market views.

Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders.

Commodity Futures Trading Commission disclosure for licensed brokers: This material is conveyed as a solicitation for entering into a derivatives transaction.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Matt Zeman is a trader at Kingsview Financial. He began his trading career as a runner in the grain pits at the Chicago Board of Trade before becoming an arbitrage clerk. Eventually he started trading equity options and stocks. Matt now is a full-time futures broker and also authors a blog for gold investors at Appreciate Gold. He has been a frequent guest on CNBC, Fox and Bloomberg, and provides his views on the stock, bond and futures markets for financial media including Dow Jones, the L.A. Times and The Associated Press. Matt is a member of the Chicago Board of Trade, and carries series 3, 7 and 66 licenses.

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