Gold leads the way Last week we wrote about the gold to silver ratio. Our points were that it measures the price of one metal against the other, just as we use the dollars per ounce to measure daily metals prices, and just as we use ounces per Corvette to measure purchasing power preservation. Also, we discussed the range of movement that silver has around gold over the past fifty years. We laid out notes for when to buy silver against gold, and when not to. The Long Run Relationship Between Gold and Silver Today we expand on the gold to silver relationship. Traditionally, gold moves first, with silver following but moving relatively more. Since the 1970s, in all the big price moves studied, we find that although silver goes farther, gold leads the way by moving
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Last week we wrote about the gold to silver ratio. Our points were that it measures the price of one metal against the other, just as we use the dollars per ounce to measure daily metals prices, and just as we use ounces per Corvette to measure purchasing power preservation.
Also, we discussed the range of movement that silver has around gold over the past fifty years. We laid out notes for when to buy silver against gold, and when not to.
The Long Run Relationship Between Gold and Silver
Today we expand on the gold to silver relationship. Traditionally, gold moves first, with silver following but moving relatively more.
Since the 1970s, in all the big price moves studied, we find that although silver goes farther, gold leads the way by moving first.
This is so important because it means that silver investors can typically get a free look at the future before they need to commit money. It also shows that gold and silver respond slightly different to the same global events.
The two metals response to Covid-19 in 2020 is a great example of the gold price jumped higher prior to the move in silver.
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2020 started as a normal year. In March the world began to fall apart because Covid-19 was spreading rapidly everywhere, there was no cure and little understanding of the related science.
Governments around the globe closed their economies as much as possible with the aim of preventing spread from one human to another. By early June 2020 governments made clear to everyone that they will replace lost income or wages or rent with money from the government. That message was everywhere!
Silver Set to Follow Gold
Gold got the message before silver. In fact, from June until August 2020 gold ran from US$1685 up to US$2065 per ounce. Gold investors quickly understood that governments did not have enough cash on hand to make all these income replacement payments, so more debt and more printing was coming.
Gold rallied more than 20% over this time period. But silver did nothing for over a week in early June while gold was running.
Why? Because silver is more tied to industrial production and GDP figures than gold is, so for over a week silver was trapped by the fear that maybe buying more silver because of new government debts and money printing would be a bad idea since the closed economy meant drops in physical silver demand for industrial use.
Silver roared to the party once gold moved far enough to show the new path was up. Silver moved more than 65% versus just 20% for gold!
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Starting at the US $17.40 silver increased to $29.13 in those same 2 months despite waiting more than a week to get started.
To recap Q3 2020: gold moved first, silver moved second, gold went up 20%, but silver went up more than three times that!
It turns out that this pattern of events in 2020 is not unusual. If you study all the 20% price increases for silver and gold since 1975 the results are striking. On 85 different occasions, two metals rallied more than 20% in tandem.
On 60 of those 85 occasions, gold led silver by 3 days! Gold was moving up for 3 days before silver even moved at all. After adding up all the 85 occurrences and making some observations about the average. We see that a price move that pushed gold up 20% will mean that silver, on average moves up 39%.
Or double the percent increase of gold! Silver has been called the poor man’s gold because it is priced less per ounce, moves farther per ounce, and moves second. The lesson this week is to pay special attention when the gold price starts an up move, and silver just sits.
The likelihood that silver will begin to rise after gold is high. So, if gold is up four days running while silver sits. The math above hints that silver is planning to get itself caught up to gold’s rally and maybe even blow past it to run farther.
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