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Silver Outperforming Gold

Adam Hamilton     February 1, 2019     2725 Words

Silver recently started outperforming gold again, a watershed event.  For long years this white metal has mostly lagged the yellow one, relentlessly battering silver sentiment.  But gold surging into year-end 2018 finally sparked some life into moribund silver.  This is a bullish sign, as silver has soared in the past once rising prices reach critical mass in attracting new investment capital.  Silver looks to be nearing that point again.

Despite a good finish, 2018 was a rough year for silver.  Its price slumped 8.6%, way worse than gold’s -1.6% performance.  And that still masks miserable intra-year action.  At worst in mid-November, silver had plunged 17.3% year-to-date.  That was 2.2x gold’s comparable loss, and at $13.99 silver languished at a major 2.8-year low.  A soul-crushing 96% of its early-2016 bull market had been reversed and lost!

Back in December 2015 silver had bottomed a few days before gold at a deep 6.4-year secular low.  Over the next 7.6 months silver soared 50.2% higher, outpacing gold’s parallel new-bull upleg by 1.7x.  That promising start didn’t pan out though, silver crumbed once gold’s advance stalled and failed.  Ever since its August 2016 peak of $20.56, silver mostly ground sideways sandwiched between two major downlegs.

It was the latter one that finally bottomed in mid-November 2018, with hope lost and silver bearishness universal and suffocating.  Silver’s fortunes are heavily dependent on gold, and silver effectively acts like a gold sentiment gauge.  The weak silver prices reflected the lack of enthusiasm for gold, which wasn’t far above its own 19.3-month low of mid-August.  Gold had slumped to $1200, and threatened to break below.

For better or worse, gold drives silver.  Traders usually ignore the tiny silver market until gold has rallied long enough and high enough to convince them its upside momentum is sustainable.  So when gold itself is down in the dumps, silver doesn’t have a prayer.  But gold bottomed that day and started clawing back higher, so silver joined along in the bounce.  That gradually grew into a new silver upleg over the next 8 weeks.

By early January, silver had rallied 12.4% on a 7.7% gold rally.  That made for 1.6x upside leverage to gold, which is still on the low side historically.  But it was a welcome change after silver spent much of last year sliding considerably.  A sub-span of that advance really caught my attention.  Between the hawkish FOMC meeting on December 19th to the young new year on January 3rd, silver surged 7.9% in 9 trading days.

That was 1.9x gold’s 4.2% advance, and silver’s best outperformance relative to gold since that major upleg in H1’16!  Something was changing in the left-for-dead silver market, with capital starting to return after more than a couple years of self-imposed exile.  Over this past week silver enjoyed another solid stretch of outperformance, offering further confirmation.  It started last Friday when gold itself soared 1.7%.

Gold ignited after a Wall Street Journal article claiming the Fed was considering ending its quantitative tightening early!  That dovishness hit the US dollar and catapulted gold higher.  Over the next 4 trading day’s silver surged 4.8% on gold’s 3.0%, for 1.6x leverage.  If that buying can push silver high enough to reach a psychological critical mass and become self-feeding, it portends major silver upside in coming months.

The more silver rallies, the more speculators and investors will want to buy it.  The more capital they push into silver, the faster it will ascend.  Buying begets buying in silver just like almost everywhere else in the markets.  While upside momentum in itself is bullish anytime, silver’s upside potential is far greater than usual because it has been so darned undervalued.  That’s made room for massive mean-reversion gains.

Silver’s “valuation” can be inferred relative to gold, its dominant driver.  While the global silver and gold supply-and-demand profiles are independent with little direct linkage, these precious metals are joined at the hip psychologically.  Silver rarely rallies materially unless gold leads the way.  Silver traders look to gold for cues, which makes silver amplify gold’s moves.  Silver’s technical relationship to gold is ironclad.

All this makes the Silver/Gold Ratio the most-important fundamental measure of silver-price levels.  It is technically calculated by dividing daily silver closes by daily gold closes.  But that yields tiny decimals that are hard to parse mentally, like the mid-week SGR of 0.012x.  It is far more brain-friendly to consider this ratio from the opposite direction, via the Gold/Silver Ratio.  This week it ran at an easier-to-comprehend 82.2x.

Mathematically the SGR is identical to an inverted GSR.  So charting the GSR with an upside-down scale yields the same line as the SGR, but with way-more-intelligible numbers.  Here this inverted-GSR SGR proxy in blue is superimposed over the silver price in red.  Silver has rarely been lower relative to gold than it was in recent months.  That portends monster upside as silver mean reverts higher leveraging gold.

 

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