Gold, Silver
and the Dow
The following is an extract from
commentary that was posted at www.speculative-investor.com on 12th May
2002.
Gold versus
Silver
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.
Acknowledgement: 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
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and
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