Gold...vs...Silver

  1. 963 Posts.
    I'm not sure if the charts will come up but it's a good read anyway.

    Cheers Ralph


    Gold versus Silver

    By Steve Saville
    May 14 2002

    This commentary has been provided courtesy of 321gold.com



    The following is an extract from commentary that was posted
    at www.speculative-investor.com on May 12 2002.

    In our 6th May commentary we said that our expectation has been, and still is, that gold would out-perform silver "until the general level of commodity prices, as represented by the CRB Index, began a major up-trend. Being as much an industrial commodity as it is a form of money silver tends to do better than gold during those periods when commodity prices are trending higher."This comment sounds quite logical (even if we do say so ourselves) and, strangely enough, is supported by what has actually happened over the past 30 years.

    Below is a long-term chart comparison of the silver/gold ratio and the CRB Index. Note the general tendency for the two to trend in the same direction over extended periods, indicating that silver does usually out-perform gold when the general level of commodity prices is in a long-term up-trend.




    There are, in fact, two times when silver tends to out-perform gold - when commodity prices are trending higher or when the stock market is in a multi-year up-trend. Strength in silver relative to gold was a characteristic of the period from 1991 through to 1999, an era of considerable stock market strength. It also occurred during the cyclical stock bull market of 1975-1976 and during the 1982-1983 stock market rally.

    Further to the above, gold will probably continue to out-perform silver until either a) the CRB Index provides some technical evidence that it has commenced a major up-trend, or b) the stock market reaches a long-term bottom. As we've previously explained, a likely time for a major stock market bottom to occur is during the period from October-2002 to January-2003.

    Even if silver performs poorly relative to gold for the remainder of this year it is still likely to do well in absolute terms. There is little chance that the gold price will move sharply higher without the silver price also experiencing a sizeable gain. Furthermore, if silver under-performs gold it does not necessarily follow that the stocks of silver mining companies will under-perform the stocks of gold mining companies. As stated in our 1st May commentary:

    "The gold stock universe is tiny compared to the overall stock market or even compared to many individual corporations, but it is enormous compared to the silver stock universe. As such, once the silver price finally breaks above the brick wall of resistance at $4.80 the silver stocks will fly."


    The combined market capitalisation of all the word's silver producing/exploring companies is so small that even a small amount of interest from the investing/trading herd could produce massive gains in the prices of silver stocks.

    The Dow in Terms of Gold

    Lest anyone get the idea that the Dow is close to a major bottom and the gold price is close to a major peak, below is a long-term chart of the Dow/gold ratio. Looking at the big picture we can see that the Dow, in terms of gold, is still very close to the secular peak reached in 1999. Note that the previous secular peak was reached in 1966, following which the Dow trended lower for 14 years relative to gold. In a world where the US$ is losing its purchasing power at an accelerating pace a substantial decline in the Dow/gold ratio will tend to come about more from a rising gold price than from a falling Dow.






    Acknowledgment: The Dow/Gold and Silver/Gold ratio charts included in this article are modified versions of charts available at Nick Laird's (Sharefin's) excellent web site: http://www.cairns.net.au/~sharefin/Markets/Master.htm

    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
    Hong Kong
    May 14 2002
 
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