(In a few days we’re going to announce exciting news about a way that savvy investors can profit from rising gold and silver prices… stay tuned.)
Often, when the price of an asset is up well into the double digits in seven months – like gold (+24 percent) and silver (+41 percent) are in 2016 so far – it’s a good time to sell. But in this case, it looks like both are only getting started.
Since we highlighted silver on May 12, its price has risen about 14 percent. Then we discussed the gold-to-silver ratio, which reflects how much silver is required to buy an ounce of gold. Since the late ‘90s, the gold-to-silver ratio has fluctuated between about 45 and 80. With the ratio close to 80 back in May, we suggested silver was cheap compared to gold.
The gold-silver ratio has now fallen back to about 68 – but that only means silver is no longer as much of a bargain compared to gold. Both metals could continue to move higher.
Of course, no asset moves up in a straight line, and some precious metals might be due for a pullback. But even if they fall a bit in the short term, both gold – and its lower-priced cousin silver – have a lot further to rise in the current bull market. (A few days ago we suggested that it might not be crazy to think that gold could rise by 500 percent.) And history tells us that if gold goes up a lot, silver will go up even more.
Why silver and gold?
Global economic conditions that have been supportive for precious metals in the first half of 2016 are still in place – and possibly intensifying.
NIRP, short for “negative interest rate policy,” is spreading around the world. By charging people to hold money in bank accounts, central banks hope to encourage savers to put their money to work – to buy things and invest in the economy.
But after two years of NIRP, the global economy is stagnant. Rather than spending and supporting economic growth, global investors have been more inclined to speculate on real estate or stocks, stuff cash under their mattresses, or buy gold and silver. Central banks of the world have continued to print money and push rates even lower.
One of the traditional red marks against gold and silver investments is that they don’t generate income. But in a world where investors must pay for the privilege of keeping money in a bank account, precious metals are attractive by comparison – especially when prices keep going up.
Gold and silver also benefit from “flight to safety” when investors are wary of global market conditions. Brexit was the latest example of this. Also, weakness in China’s economy and its currency – which is down 7 percent over the past year and is hitting new lows against the U.S. dollar – continues to scare markets.
As goes gold, so goes silver – only more
If history is a guide, the higher gold goes, the more attractive silver becomes to speculators. Because silver at its current price of US$19.60 an ounce has such a lower price compared to gold at US$1,330 an ounce, many investors feel they can get more “bang for their buck” by buying the grey metal. The higher gold goes, the more traders focus on “cheaper” silver.
To illustrate, in the recent gold bull market, gold rose from about US$270 in June of 2001 to a high in August 2011 of US$1889 – a gain of 600 percent. Over that same period, silver moved from about US$4 to over US$43 – a gain of 975 percent.
In the most speculative part of this precious metals bubble, from October of 2008 to August of 2011, gold rose 165 percent. Silver surged 400 percent. So when precious metals enter the mania stage of a bubble, it’s silver that attracts the most extreme speculation.
The flip side is also true. When precious metals fell from their spring 2011 peak, bottoming last November, gold dropped about 44 percent. Silver fell 68 percent.
The prices of gold and silver are highly correlated, which means that the two metals tend to move up and down together in unison. But silver is much more volatile than gold. One explanation for this is that there is simply not as much silver traded as gold, therefore it doesn’t take as much buying or selling to move the price of silver.
This volatility makes silver especially attractive to day traders, who are gamblers who try to profit over very short time frames, often only holding positions for hours. For day traders, volatility is a good thing, as they believe they can profit from the big intraday moves. (This is usually a delusion, thought, as nearly all day traders lose money over time.)
Due for a pullback?
The price of silver is likely to continue to rise in coming months. In the short term, though, it might be due for a correction. Investors who look at securities’ price charts to try to predict future price movements – which is called technical analysis – sometimes look at the 50-day moving average price of a security. That’s the average closing price of a stock over the previous 50 trading days.
By comparing the current price to the 50-day moving average, a technical analyst can get a sense of whether a stock is overbought (that is, due for a correction) or oversold (or, ready to rise).
The iShares Silver Trust (New York Stock Exchange; ticker: SLV) is the most actively traded silver ETF in the world and closely tracks the price of the metal. It’s an easy way to invest in silver. (Hong Kong investors can also use the ETFS Physical Silver ETF, code 3117.)
SLV trades around US$18.70. But the ETFs 50-day moving average (50 MA) is much lower at US$17. Remember that market prices are mean reverting – like a stretched rubber band, they have a tendency to snap back after an extreme move. It’s likely that SLV will fall back toward its 50-day moving average, before resuming its upward rise.
But even if silver, or gold, prices fall in the short-term, holding some silver along with gold as part of a diversified portfolio still makes sense. If the economic and political uncertainties in the world continue to build, it’s logical to assume that the uptrend in precious metals prices will also continue. And should a full blown crisis hit, you’ll be thankful to have the insurance of gold and silver in your portfolio.
And watch for an announcement within the next few days on how you can make money in this precious metals bull market.