Will Silver Start to Outperform Gold?

Precious metal fans face a conundrum in choosing to buy silver rather than gold: silver prices are more volatile but have always outperformed gold prices in previous financial crises.

So you might sleep better as an investor in gold but ultimately lose out to silver. An equal split asset allocation is one way of hedging sleep and performance.

It is notable, for example, that the correction in silver prices since the peak of March 2008 has been larger than gold. Silver more than halved before rebounding while gold lost a third in price before coming back.

Looking forward

Then again if you had bought at the bottom point for both metals over the past year gold is now much closer to its March 2008 peak price than silver, and you would have made more money. What to do going forward?

The gold-to-silver price ratio is now 70 compared with a range of 30-100 over the past three decades, although it has been as low as 15 during periods when silver was used as money.

Given that currency competitive devaluations and inflation are the likely drivers of higher precious metal prices over the next few years that would seem to give the advantage to silver. It does tend to become a ‘poor man’s gold’ as gold prices rise, and in India there is already some evidence of this happening.

The real test for gold and silver will come in the next down leg of this bear stock market towards a capitulation phase. Will those finally giving up on equities shift their money into precious metals if they fear inflation is about to hit bonds?

Judgment call

It is possible, or there might be an intermediate phase in which gold and silver are temporarily sold down in a market crash - like last autumn - and only later find their role as a bond replacement.

However, history suggests silver will be the better performer, and stocks of silver are reckoned to be less than one-hundredth the size of gold reserves, so the supply and demand equation is already stacked in favor of silver. Monetize gold and silver and there will not be enough silver available and the price will go up.

There is a risk that gold and silver prices will fall as equity markets fall, or even a risk that foolish investors might send the stock market rally a little higher, but probably the biggest risk is being caught short of both precious metals when prices take off.

Comments

[drbob66:]

"the biggest risk is being caught short of both precious metals when prices take off."

Well, you can always buy them at a little higher price. As long as they're going up in price, it's all good, right?

Apr 09 08:09 PM

[DONE_SONZ:]

I say gold above the rest,but sillver,platinum and copper miners are holders too.

Apr 09 10:44 PM

[Candor7:]

Book in the silver bullion. Its a no brainer.

Apr 09 11:54 PM

[Sakata:]

On Apr 09 08:09 PM drbob66 wrote:

> Well, you can always buy them at a little higher price. As long as
> they're going up in price, it's all good, right?
>

Only if you see it happening and know to buy in at the right time. If you don't see it now then there is a good chance you won't see it when it happens either.

Plus, if you spend $10,000 now, you will have about 800 ounces. If you wait until it is $20/oz you will only have 500 ounces. Once silver hits $50/oz that will be worth $25,000 instead of $40,000.

Apr 10 06:16 AM

[jhm47:]

One of these days (and I would never presume to predict when), silver could take off like a cheetah with a tabasco sauce enema. On the other hand, if deflation takes hold, it could sink like the Titanic. However, with these trillion$ being thrown around like confetti, I think that inflation is nearly a certainty.

I will continue to hold what I've got, and add to my position as much as I can. Even if silver should tank (very doubtful), I've got lots of silver coins that can't possibly go below face value. In these times of total monetary chaos (inflation, deflation, stagflation, government flatulation) anything is possible. It's going to be a looooooong four years!

Apr 10 09:59 AM

[Vox Rationalis:]

"Given that currency competitive devaluations and inflation are the likely drivers of higher precious metal prices over the next few years that would seem to give the advantage to silver."

Nonsense. If a currency loses value, it does so across the board.

"Will those finally giving up on equities shift their money into precious metals if they fear inflation is about to hit bonds?"

Maybe. Or maybe they would find productive investments (such as bonds or preferred shares) that offer inflation protection.

"It is possible, or there might be an intermediate phase in which gold and silver are temporarily sold down in a market crash - like last autumn - and only later find their role as a bond replacement."

You completely miss the core story of last fall, which was an unprecedented flight to quality. This explains dollar and Treasury appreciation, and why gold outperformed all other commodities. However, it provides a mixed bag for gold in the near term, as increasing risk tolerance should tend to push the dollar lower, but also reduce gold demand, as funds exit these safe havens.

"However, history suggests silver will be the better performer."

Where's your supporting evidence?

"...and stocks of silver are reckoned to be less than one-hundredth the size of gold reserves, so the supply and demand equation is already stacked in favor of silver."

Nonsense. Silver is not kept in stock because its industrial value is greater than the market price - almost completely untrue for gold. And silver production is much higher - the largest silver miner produces more by weight than the entire world produces of gold. The markets for the two are really not comparable.

"Monetize gold and silver and there will not be enough silver available and the price will go up."

Hope away. Flap your arms just right and maybe you can fly.

"There is... even a risk that foolish investors might send the stock market rally a little higher..."

Yes, those foolish investors just might buy stocks that are historically undervalued.

"...but probably the biggest risk is being caught short of both precious metals when prices take off."

Folks like you have been saying this will happen imminently for at least six months. In that time, we've had central banks around the world take unprecedented steps that increase the size of their money supplies, and yet gold is now basically unchanged since September. If a 30% decline in equities and and central banks "printing money" and "monetizing the debt" hasn't caused gold to skyrocket, what exactly do you think will?

Apr 10 11:54 AM

[5142152-337:]

Peter, thanks for the article.

David Clayton: I don't need to defend Peter, I am certain he is quite capable of doing that himself, however, I shall make one observation. First, you did have some interesting commentary. That said, the OBVIOUS reason for the laggards (gold and silver) during the tumultuous times the last few months is due to MANIPULATION by JPMorganChase and USBank. Is there any doubt that they have supressed the prices of these assets? One only has to look at CTFC's own reports. Try COMEX data. C'mon, David. Its going to take a little more time, but to be sure, the end is closing in fast. The day that those shorting gold and silver come to the realization that its now time to go into their garage, get that garden hose, stick one end into the exhaust pipe, the other into the back window, hop in, close the door, turn on the ignition, and tune in to their favorite easy-listening radio station, is the day we PMs have been waiting for! Paper gold and silver is RAPIDLY becoming overtaken by PHYSICAL GOLD and SILVER. Those greedy elitist bastards have been playing the system and they are SO greedy, only the above solution will be their out. Will you lift your glass with me?

Apr 10 12:51 PM

[Allan Frain:]

The CFTC reports demonstrate the concentrated short positions. I would not attribute these positions to greed. The "Bad Bank" is likely already in play and there will never be allowed losses on these positions.

Apr 11 01:59 AM

[andypandy:]

You invest in GLD and SLV, how are we supposed to take you seriously.

Apr 12 06:30 PM

[andypandy:]

you hold GLD and SLV, novice metal investors in metals hold GLD and SLV....

Apr 12 06:31 PM

[Larry House:]

I don't think it is ever just one or the other (gold or silver). Land sakes, just hold them both!

Apr 14 09:54 AM