Silver versus Gold

February 4, 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 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.

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.

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