Silver: Mind The Performance Gap Vs. Stocks

Includes: DBS, SIVR, SLV, SPY, USV
by: Eric Parnell, CFA

Silver has some catching up to do.

A notable development during the current round of monetary stimulus is how silver has trailed stocks (NYSEARCA:SPY). Given that we remain in an environment where global central banks are intent on continuously providing aggressive monetary support, silver stands to benefit from its position as hard asset protection against currency debasement. Thus, it is likely only a matter of time before silver begins catching up.

For the purposes of this analysis, I will focus on the iShares Silver Trust (NYSEARCA:SLV). However, the same price principles apply to the ETFS Physical Silver Shares (NYSEARCA:SIVR), the PowerShares DB Silver ETF (NYSEARCA:DBS) and the UBS E-TRACS CMCI Silver Total Return (NYSEARCA:USV).

The following is a price chart of stocks versus silver during the most recent monetary stimulus phase. While they initially tracked each other closely, Stocks eventually entered into a melty drift higher while silver entered a more chaotic phase. This has resulted in a meaningful outperformance gap for stocks over silver that has yet to fully close.

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Such a performance disparity was certainly not the case for long in past stimulus episodes. When the Fed effectively announced QE2 back in August 2010, silver took off like a rocket and massively outperformed stocks.

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During QE1, the story was somewhat more nuanced. Stocks initially outperformed silver by a wide margin in the first three months of QE1. This can be explained in large part by the fact that silver had held up much better than stocks during the sharp correction leading to the market bottom in March 2009. But after the first three months following the market bottom, silver went on to outperform stocks for much of the remainder of QE1 before ending effectively even.

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So while silver has trailed stocks during the latest monetary stimulus phase, it is likely only a matter of time before silver begins to close this performance gap. This implies that silver may soon be set to outperform stocks on a relative basis. Of course, any outperformance will likely be accompanied by the high daily price volatility that is inherent to owning the white metal. But for those investors who can tolerate the daily swings along the way, they stand to benefit relative to stocks over time.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Disclosure: I am long SLV.