Is silver the new gold?

There are a few reasons why silver cannot become gold. First, Gold is the sector leader not silver. Second, though both gold and silver were used as a currency, historically it’s gold that is the real proxy for currency. Third, since 1980s there are only on three occasions Silver has outperformed Gold (Fig 3.) for a brief period (1983, 1997, 2007, and 2011).

1983 was near the top of commodities. Just like equity, when markets top, it’s the small cap that is racing ahead of blue chips. It was a similar situation in 1983. Then in 1997, silver outperformance accompanied Dow topping. Silver was leading equity and when silver underperformed Gold, the ratio line (silver vs. gold) witnessed Dow falling with it down till 2002. We all know what happened in 2007 (Fig. 4). Now we are in 2011, the fourth occasion since 1980’s when Silver seems to challenge gold. This cannot last.
What does this mean? This means that it’s time for Silver to underperform Gold. It also means that sentiment should turn from confidence to caution when Silver underperforms Gold. Rising silver-gold ratio is a sentiment indicator suggesting confidence while a falling ratio line suggests worry and fear. Measuring the degree of fear is the harder task, but with VIX already at historical lows, markets into seasonally weak period, secular bull getting more than 24 months old, the sentiment indicator does not look too encouraging for Dow and US equity.
Above this the silver…
This article was written for ATMA.
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