How Soon Will Silver Outperform Gold?
In this article, we ask the key question on precious metals: when will silver outperform gold in price? Our answer is: right now in the process. We will show this by comparing gold and silver from the cycle analysis perspective. We will analyze the respective gold and silver stocks.
We first look at the big picture based on monthly and weekly data and then perform drill-down analysis using weekly and daily price data.
Gold And Silver Are Twins
The following chart shows the long term weekly price data of gold and silver:
Note that the gold and silver bull markets which started in 2000 is now resuming their rise in 2016. The correlation coefficient for this time period is 0.98. Indeed gold and silver behave like twins.
Following table lists the correlation coefficients for a wider set of assets:
- In addition to gold and silver, gold and oil are positively correlated (0.55), though to a lesser degree than gold and silver. They all belong to hard and tangible asset class.
- All other correlation coefficients are negative. In particular gold and DOW have a negative correlation (-0.88).
- What are the implications for price movements for gold and silver in 2016? Both gold and silver will rise dramatically this year till 2020. So will oil price rise, despite the sharp drop in recent years. The other assets including DOW Stock Index, US dollar and housing values will experience severe downward pressure.
Comparing Silver with Gold
CEF to Gold Ratio
In comparing silver to gold, we like to use the price ratio of Central Fund of Canada (CEF) to Gold. This ratio oscillates between two extremes as shown in following chart. The CEF fund consists of equal portions of physical gold and physical silver. The cycle analysis confirms that silver is beginning to outperform gold with their likely price target in 2016:
Gold Price = $1600, Silver Price = $35
Comparing Silver Stocks with Gold Stocks
There are no long series of silver stock data. So we compare the ratio of silver stock company (PAAS) to the gold stock index ($HUI) . We then compare other ratios of gold and silver based on recent ETF’s: SLV versus GLD, and SIL versus GDX.
Silver Stock (PAAS) to Gold Stock Index (HUI)
Our analysis shows that this silver stock will outperform the gold stock index. In our view, silver stocks are the most attractive investments in 2016. Of course, silver stocks comes with higher price volatility and hence risk.
Precious Metal ETF’s and The Golden Cross
The use of Exchanged-Traded Funds (ETF’s) have become popular in investment circles. They reflect and track principally the stock indices for various asset class and sectors. Here we consider 2 short term daily ratios: (1) silver to gold ratio, and (2) silver stock to gold stock ratio. We use the traditional “golden cross” i.e. crossing of 50-day moving average with 200-day moving average to determine the key pivot points for change of price trend.
Silver (SIL) to Gold (GLD) Ratio
This chart confirms that the silver (SLV) is starting to outperform gold (GLD).
Silver Stock (SIL) to Silver (GDX) Ratio
The same trend holds for silver stocks relative to gold stocks.
From Historical Perspective
The following chart gives a very broad picture of gold to silver price ratio for a very long time period. The inserted table summarizes the ratio and price projections.
- It is estimated that gold price will rise 6 times higher from the current level while silver will rise 25 times higher by the end of 2020.
- The normal historical value of gold to silver ratio usually lies within the bounds of 40 to 20. The current extremely high ratio of 76 will eventually drop to low 20.
Our analysis indicates that silver and silver stocks are in the process of outperform gold and gold stocks. With the current gold-to-silver ratio at 76 dropping to 20 in 2020, this represents an enormous investment opportunity in the hard asset class. At this time, there is less than 3% of the funds are invested in precious metals. While the ongoing financial turmoil, this scene can change.
Note of warning: We are not professional fund managers. For personal investments, please do your own research and consult your own financial advisors.
F.T. Dao is a private investor and recently left the corporate world for technical analysis of stock markets. He holds a PhD degree in physics and has done technical analysis of the market on the side for many years. He welcomes constructive discussion and can be reached at: firstname.lastname@example.org , email@example.com