Here is an extract from commentary that was
posted at www.speculative-investor.com on 26th January 2003.
Gold tends to
out-perform silver during those periods when confidence in
the US$ is falling and/or the US economy is weak. When the
US$ is strengthening and/or the prospects for the US economy
look bright, silver tends to out-perform gold. Also, once
a trend in the silver/gold ratio has been established it tends
to last for a decade.
Below is a long-term
chart of the silver/gold ratio (the chart is compliments of
www.sharelynx.com). The chart shows that:
a) Ignoring the huge spike
in the ratio resulting from the Hunt brothers attempt to corner
the silver market in 1979-1980, the silver/gold ratio essentially
moved sideways during the 1970s (the level of the ratio in
mid-1979 was about the same as it had been at the beginning
of 1972). It was, however, very volatile (there were, in fact,
5 separate periods between 1972 and 1978 when silver gained
or lost at least 30% relative to gold, with the biggest move
being a gain of more than 70% during 1975-1976).
b) During the 1980s silver
trended lower relative to gold.
c) During the 1990s silver
trended higher relative to gold. Not coincidentally (we think),
the 1990s uptrend in the silver/gold ratio occurred in parallel
with the 1990s equity bull market.
d) Over the past 3 years silver
has trended lower relative to gold.
Our long-term view (a view
that we've held for the past 2 years) is that the silver price
will either keep pace with the gold price during the current
decade as it did during the 1970s (with gold leading during
the initial phase of the bull market and silver then catching
up at some point), or it will under-perform. We see very little
prospect of the silver price trending higher relative to gold
over the next several years. This view was originally based
on our long-term outlooks for economic growth and the US$
and has subsequently been supported by the performance of
the silver/gold ratio.
The arrows on the above chart
point to when the three most important stock market bottoms
of the past 30 years occurred. It is clear that the silver/gold
ratio tends to reach at least an intermediate-term bottom
at around the time the stock market is reaching an important
low. Therefore, immediately following this year's bottom in
the stock market we should expect at least a 12-month period
during which the silver price will substantially out-perform
the gold price. Does this mean we should switch our emphasis
from gold to silver when evidence of a stock market bottom
emerges? Possibly, although the industrial metals such as
copper and aluminium are likely to out-perform both gold and
silver after the stock market bottoms. In other words, rather
than shifting our primary focus from gold to silver it is
probably going to make more sense to shift from gold to the
industrial metals.
********
Regular financial market forecasts and analyses
are provided at our web site:
http://www.speculative-investor.com/new/index.html
One-month free trial available.
Steve Saville
|
