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What Is A Better Investment Now Gold Or Silver, Redux 2015?

About a year ago, on May 27, 2014, I published an article titled What Is A Better Investment Now: Gold Or Silver?   There are times when gold is a better investment and there are times when silver is a better investment.  This was illustrated in that article with the following chart. 

Click here to see an enlarged chart.

In May 2014, I had concluded that gold was a better investment than silver.  The chart below shows how accurate that prediction has been.  During the one year period since the conclusion, gold has outperformed silver by about 9.61%. 

Click here to see an enlarged chart.

Not only gold outperformed silver, it exhibited considerably lower volatility than silver.  During the period shown on the chart from peak to trough, silver dropped 31%.  In comparison, gold dropped from peak to trough 15%.

The more important question is, “What is a better investment for the next year?” 

An important principle I follow is that no one, including me, knows with certainty, what is going to happen next.  This has come to be affectionately known as Nigam’s Second Law of Investments. The only thing we can rely on is probabilities. At this time the probability is high that over the next 12 months gold will be a better risk adjusted investment than silver.  Here are the reasons for this conclusion.

Central Banks

Central banks, especially those in Asia and Russia are likely to continue to buy gold.  Previously during the European sovereign debt crisis, there was a risk that European Central Banks would sell gold to pay their debts.  That risk is now in the rear view mirror.  Europe has stabilized; the threat of massive sales of gold by European Central Banks over the next year is extremely low. 

In Europe, Greece is still a big issue.  The Bank of Greece sold some gold in January 2015.  Greece is unlikely to sell more gold.  Until the Greek crisis is resolved, it will continue to provide some support for gold.  If Greece exits Eurozone, such an event will be a major support for gold.

QE In Europe And Japan

Both Europe and Japan are in the middle of massive Quantitative Easing (QE).  The U. S. has finished its quantitative easing.  To date, the U. S. QE has not resulted in hyperinflation contrary to what many had expected.  Further there was wide spread anticipation that the U. S. QE would weaken the dollar.  Paradoxically, instead of weakening, the dollar has become stronger.

It will be foolish to conclude from the foregoing that all effects of QE are already known. The jury is still out as to currency debasement and hyperinflation as a result of QE over a longer period of several years.

The point is that investors should look at gold as an alternate currency.  There is a significant probability that sometime in the future gold will appreciate against fiat currencies.  This is the best argument for buying gold.  No such argument can be made for silver. 

Gold-to-Silver Ratio

Proponents of silver often point to the gold-to-silver ratio to make a case for silver.

Prior to 1900, gold-to-silver ratio fluctuated around 16.  Such a gold-to-silver ratio today would mean a silver price of $74 per ounce; this implies about 362% gain in the price of silver.  However, such an analysis is flawed because in those days gold and silver backed currencies were common place and the governments dictated the gold-to-silver ratios.  We live in a very different world now where there are no major gold or silver backed currencies.

In the last century, the gold-to-silver ratio has fluctuated around 50. A ratio of 50 implies a silver price of $23.68, an appreciation of about 48%.

However the foregoing analysis is highly flawed for three reasons. 

  • In the last century, a major use of silver was for imaging.  With the advent of electronic imaging, silver use in imaging has dropped off the cliff. 
  • Mine production has significantly increased. 
  • Going forward, the demand for silver jewelry will not keep up with the demand for gold jewelry.

Speculative Juices

Silver performs better than gold when speculative juices for precious metals are at a high level.  This is not the case at present and is not likely to change in the near future barring a major change in macroeconomic conditions.

New Production

In our analysis at The Arora Report, the production of gold is likely to be in line with projections, but production of silver is likely to exceed projections.

Smart Money

Every time in the recent past precious metals have rallied, smart money has sold silver more aggressively than gold.  Unless macroeconomic conditions change, silver is likely to experience more selling pressure than gold.

Current Ratings On Gold And Silver.

The ratings on gold and silver at The Arora Report are generated by complex algorithms that automatically change with market conditions.

The background colors on the charts are automatically generated by a combination of some of our algorithms; green is bullish, maroon is bearish, and blue is neutral. The chart analyzed here is a daily chart.  Similar signals are automatically generated on yearly, quarterly, monthly, weekly, hourly, and 15 minute charts.  Combination of these signals is then input into another algorithms that has many additional inputs such as relationship between currencies, interest rates, sentiment, money supply, global geopolitical picture, global GDP growth, inflation in key countries, leading indicators of inflation, risk appetite, etc. 

Some of the inputs are adaptive, i.e., their weight changes based on conditions and co-relations. The adaptive nature of the algorithm has been the most important reason behind consistently accurate calls on gold and silver by The Arora Report over the years.  Experience has shown that algorithms that are static stop working after a while because market conditions change.   For this reason, investors and traders should avoid algorithms that are fixed.

Of course, our timing models on gold and silver are much more sophisticated and take into account many more factors.  Here are our current ratings.

  • Negative in the very, very short-term. 
  • Negative in the very short-term.  
  • Neutral in the short-term, but a serious potential downside risk. 
  • Neutral in the medium-term, but a serious potential downside risk.
  • Mild Positive in the long-term.  
  • Positive in the very long-term.

These ratings are reviewed daily and changed frequently to help both long-term investors and short-term traders.  These ratings are used by bullion dealers, jewelers and investors across the globe.  For definition of time frames, please click here.

By Nigam Arora
Chief Investment Officer

Full Disclosure: Subscribers to The Arora Report are provided precise buy zones and sell zones as appropriate.  Further, subscribers to The Arora Report may undertake short-term trading positions in addition to the very long-term generational opportunities.


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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