When investors and individuals think about precious metals, it’s usually Gold that pops into their minds, not least because of the amount of media attention the yellow metal generates but also because of its desirable physical properties and safe haven status. However, there is another contender within the precious metals matrix that is more than worthy of consideration and that is Silver.
Often thought of as the “poor relation” to Gold, Silver is in fact quite a dynamic investment vehicle in its own right. Indeed, Silver could even be considered to act as a geared play on its higher priced sibling.
One way to try to quantify the relationship between the prices of Gold and Silver is to consider the price of Gold expressed in Silver; in effect the Gold to Silver exchange rate. Given Gold’s Status as alternative currency and Silvers historical connections to money, it seems highly appropriate to do so.
Gold and silver have long been seen as stores of value and a hedge against inflation which in turn means there is a good deal of historical data available, indeed some of it dating back hundreds of years. Dave Kransler a blog writer on Social Trading and stock market information site Seeking Alpha has drawn investors’ attention to a 100 year chart of the Gold / Silver Ratio (GSR) in a recent article.
What the chart reveals is that the GSR has been as low as 15 on four distinct occasions over the last 100 years and that we may in fact be heading back there once more from the current levels around the current 61 level. Note that the high point in this relationship has been priced around 100 as we can see from the chart and being just before the outbreak of the second world war and more recently in the early 90’s.
Moves towards the lower end of the range are thought to indicate the end of a bull market for Precious Metals while conversely a move to the higher end of the range is suggestive of the end of a bear market in Gold, Silver et al. With the ratio currently standing at 60.69, we are closer to the top end of the ratio than we are to the bottom.
We are not inclined to place too much credence on the 100 year chart however, preferring instead to focus on the period following the introduction of floating exchange rates and the abandonment of currency controls which marked the start of the modern era of free trade, in essence the period since the early 1980’s. Additionally, given the rapid rise of ETFs in the last 10 years and other methods to facilitate paper trading of precious metals, it could be argued that we should focus upon the relationship between gold & silver over a shorter time frame still.
We have plotted a chart below that covers the period from 2011 to the current date. We can see that the GSR made a bottom in late April 2011 – just below 32 – as silver was making new highs but subsequently rallied away from that level as Gold pushed on to print highs of $1921.15 in August 2011 before selling off again. Recent price action in the Gold/ Silver ratio has seen the measure test up to 65 before failing there and retreating and so potentially being a precursor to a more sustained rally in silver, a sort of turbo charge around our expected price appreciation of gold.
We have in fact in recent weeks broken down below the uptrend that dates back to those April 2011 lows as the chart below shows – adding credence to the silver bull story.
If we look at the two year chart for London Spot Silver below, it looks very much like a near term upside opportunity to us, the silver price having broken through the 9 months downtrend. We are likely to begin accumulating silver and selected silver stocks in the days ahead in our Precious Metals fund and look for a move back towards $24.00 in the months ahead with an end year target of $26 or beyond.