"I always get a bit confused when it comes to ratios so I wonder if you could help explain your comment on the likely outperformance of silver in the medium term based on the gold/silver ratio?

"The ratio ranged between 46 and 80 from 1997 to late 2010 and broke downwards in January. This would suggest that while silver is overextended in the short-term, it is likely to outperform gold over the medium-term."

"I have plotted some theoretical prices for gold and silver below to help me get my head round the ratio. If I understand your comment correctly then you would expect the ratio to increase from about 42 today back into the range (46 to 80). For this to happen then either the gold price must increase relative to the silver price or the silver price must decrease relative to the gold price, based on the figures below. But your comment seems to imply the opposite, so perhaps you could explain where I have gone wrong?"

Eoin Treacy's view Thank you for this email which may also be of interest to other subscribers. First of all let us spell out what the ratio is indicating. At the upper side of the 1997 to 2011 range near 80, 1 unit of gold could have been purchased for 80 units of silver. At the lower side of the range near 46, almost half the amount of silver is required to purchase one unit of gold so silver has appreciated versus gold.

As a rule of thumb in any ratio where "X" is divided by "Y", if the ratio is moving upwards "X" is outperforming and when the chart is moving downwards "Y" is outperforming. This is as applicable to currencies as it is to commodities or any other two data sets.

At Fullermoney we have long described silver as "high beta gold". This means that we expect silver to rally more in the bull phases and fall more in the bear phases. Returning to the Gold/Silver ratio, silver outperformed from 2003 to 2006, performed inline with gold until 2008 and fell precipitously in absolute as well as relative terms during the credit crisis. It has returned to a position of outperformance since November 2008 and is currently in the process of breaking down from the long-term range.

Silver's pattern of outperformance was interrupted by the Lehman bankruptcy and the panic that followed. However, if we assume (and I do) that the secular bull market remains intact then silver should continue to outperform gold on most upswings. Gold performed spectacularly in the late 1970s but silver did even better. I believe there is every reason to expect a similar pattern to evolve on this occasion.

However, trading silver is not a simple matter. It is considerably more volatile than related commodities and good timing is required in order to profit from it. As with all commodities, silver is best bought following reactions towards a trend mean such as the 200-day MA. At today's elevated level, silver has given no sign that the advance is over, however we know from past experience that when it eventually does pull back, it is likely to do so rapidly. Over the medium-term, I think that the Gold/Silver ratio is likely to sustain a downward break from the 14-year range.