Like many silver and gold investors, my eyes were glued to the ticker tape this week wondering how silver and its derivative stocks would fare during this downturn in the global markets. To think that silver would be unaffected would be naïve but of course the question was in which way would it be affected? Would it go up, down or move in a channel?
Indeed it was not difficult to find commentaries which said that a stock market downturn was positive for silver because it provided a safe haven for investors while there were those who predicted that silver as a commodity must suffer since the stock market is a leading indicator of economic activity. The question being, do investors treat silver like money or a commodity?
Well, what has silver actually done in comparison to the US stock market? Using a broad index as a measure, I first plotted a semi-log graph of the silver (black) and the S&P500 index (green) for the last 40 years - click to enlarge:
On this broad sweep we can safely say that silver and the stock market are poorly correlated. During 1980-2000 silver may not have followed the stock market on an upward trend, but silver never moved upwards when the market moved down.
However, during the 1970s, it was more mixed as silver went up while the stock market went down during the years of 1972-1974 and 1976-1978 as inflation fears began to concern investors but did follow the general trend at other times.
The reasons why the 1970s and this decade provided better correlation was due primarily to US Dollar bear markets while 1980-2000 was a dollar bull market in general and a disinflationary environment which is a safe haven for fiat money investors. Moving into this decade and the present silver bull market we get just as confused a picture.
For our three silver surges of 2004, 2006 and 2008 the S&P500 index has respectively been strong, neutral and weak! In other words, if you want indications of where the price of silver may be going, do not use stock market indices to help you!
Again, let me iterate that the silver bull market is about money - fiat money versus real money. The fiat dollar has been rapidly inflating away in value for the last 6 years. At this rate it could approach half of its 2000 value but we think it will stop short of that. When the fiat money balloon expands full of worthless air, investors shift to hard money as in gold and silver. That’s the situation in a nutshell.
When the markets rallied this week on the Fed 0.75% cut, silver was certainly not rising on the tails of a stock market recovery. Rather it was responding to a large rate cut that spelled further weakness for the US Dollar and a visit to the realms of negative real interest rates.
Ben Bernanke has helped set up gold and silver for a further surge in prices. It is still not too late to get on board to hedge against the dollar losses in your other investments.