LONDON -
In mid-February my beauty therapist (yes, I admit it, it doesn't all come from within) told me of her Swiss hedge-fund manager friends who recently suggested to her that she should wait until gold falls to $1,000 - and then buy silver.
Good advice? Or dangerous?
Silver's volatility, especially with respect to short term moves and when compared with gold, is one of the keys underlying the suggestion that the lady should look at silver. A bounce in gold is often - but not always - accompanied by a better one in silver (especially if it involves short covering). But the key word here is "volatility". Smart traders can make a lot of money out of silver's sharp moves, and indeed it will often outperform gold in a bull run. Furthermore it will frequently, on a short term basis, be the metal that calls the tune when it comes to changes in trend. But does this hold up for the longer term? Silver's volatile nature has been in ample evidence over the past four weeks or so, which points to "danger", while the results of a longer-term analysis are not as rosy as one might expect.
The sector registered an early-January high before it started its latest shake-out on 19th / 20th January as the draughts of uncertainty breezed through the markets again, in response to Chinese monetary tightening (the reaction to the second move in mid-February has - so far- been less dramatic), the proposals by President Obama to rein in the US banks, at least in terms of proprietary trading, and the persistent strength of the dollar.
After a period of recovery, the second downward phase in this recent period (which, it is arguable, is merely a correction in a sustained bull market, even though that market may not have much further to run) came about through an other bout of risk-aversion. This time the markets were primarily concerned with the economic conditions in Europe, the question marks over Greece and the possibility of contagion into other southern European States.
It is, however, worth noting that while gold was originally under pressure in both these recent downward phases, it steadied towards the end of last week as some investors once more turned to the metal as a hedge against risk, notably currency risk. Silver is trying to hold up with gold, but is looking slightly precarious. Added to that the chart of the gold:silver ratio (up to 71 from 61 in mid-January) looks to have more immediate upside risk than downside).
So how have these two metals traded against one another recently and what does the longer-term relationship tell us? Silver has massively underperformed in the past weeks (as it tends to in a downward phase), but perhaps more significant is that its recent recovery has been relatively insipid by comparison with that of gold. This either suggests that the market is becoming fed up with a metal that is essentially hanging on to the coat-tails of another - or, more ominously, that it may not yet believe that the sector's recovery prospects are cut-and-dried.
Over the recent period of price weakness from early January to mid-February, gold fell from an intra-say high of $1,140 to a low of $1,060 before recovering towards $1,100. The fall was therefore of 7% from the high and the metal has since unwound 49% of that drop.
Silver fell from $18.45 to $14.65, a loss of 21% from the high and the subsequent clambering back towards $15.60 represents an unwinding of 24% of its fall.
So gold is 4% off its recent highs and silver is off by 16%,
How does its longer-term performance stack up?
Of course we can "prove" anything with statistics and choose any time horizon that we like in order to illustrate our chosen augments. So for the sake of good practice, let us put these recent moves into a loner-term context and take the falls from early December, when gold hit a record in dollar terms (and in most other currencies but not, especially not, in yen terms) and set them against the start of the bull market that kicked in during 2001. (It is often overlooked that gold has been in a bull market for almost nine years now).. Gold actually bottomed out in April 2001, while silver was less convinced and did not start to gain in price until November. For this brief analysis we are using fixing prices, not intraday.
And what do we find? Silver has underperformed in the long term bull market.
Gold's low pm fix in April 2001 was $255.95 and so, in the middle of February 2010, gold is up in dollar terms by a factor of 4.3, while its recent correction represents a 12% contraction of the size of the gain to the December high. Silver's low fix in November 2001 was $4.06. With silver fixing at $15.57 on 15th February, it has risen by a factor of 3.8 over the past 8 -1/4 years. Even correcting for the longer time period since gold's low, silver has underperformed gold over this bull run.
Even without the fact that silver is likely to be in surplus this year and that its costs of production (with the exception of some price-elastic scrap) renders a supply side cost analysis more or less redundant, this means that this most volatile metal, which can be positively fiery in the short term, still needs help from gold if it is to show any substantial and sustainable renewed strength.
So, maybe buy silver when gold gets to $1,000 - but be ready to sell it again.
