The relationship between gold and silver has changed dramatically

While gold has soared this year, silver has skyrocketed, leading to a big move in a key measure of relative strength often used by traders.

In the beginning of 2016, an ounce of gold was worth as much as 77 ounces of silver; by the end of February, that number would rise above 83. Yet on Monday, with gold trading at $1,357 per troy ounce and silver at $20.40, the gold/silver ratio is down to 66.5.

While this the lowest this indicator has been since September 2014, the ratio is actually still above historical norms. The average reading of the gold/silver ratio over the past 20 years is 61; over the past five years, it's about 63. This may suggest that some of the premium gold has recently enjoyed as compared to silver has evaporated.

Interestingly, the gold/silver ratio is one of those Wall Street Rorschach tests that is used to determine the direction of the equity market, but whose signal can be interpreted in opposite ways by bulls and by bears.

The currently and frequently bearish Larry McDonald, who publishes the Bear Traps Report, points out that the gold/silver ratio also dropped in 2011 before the market's late-summer dive.

"It's a sign of real speculation, and it's one of the things that we look at in terms of systemic risk and warning signs for the market," McDonald said Friday on CNBC's "Trading Nation."

Yet where McDonald sees a red light, currently and frequently bullish Oppenheimer technical analyst Ari Wald sees a green.

With help of a historical analysis going back to 1998, Wald reports that "when silver outperforms, over the next 12 months the S&P is up on average 11.5 percent; when gold outperforms, the S&P is only up 6.5 percent."

"We would view silver's outperformance as a signal that investors are embracing risk again," Wald said Friday, adding that "it confirms our view that we think the S&P 500 is setting up for new highs over the next coming months."

Indeed, silver's industrial uses mean that its performance is more closely tied to global growth, and consequently more highly correlated with stocks than gold is. This provides ammunition for Wald's view, which is predicated on trend-following, as well as for McDonald's, which is predicated on fading the crowd.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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