Gold To Outperform Silver

WHAT OTHERS ARE THINKING

Another excellent analysis by Tom at Metal Augmentor on the gold/silver ratio and what to look for to determine when one metal will outperform the other:

"It is a commonly held belief by many precious metal investors and even a good percentage of market pundits that silver always outperforms gold during the latter stages of a precious metals rally. … The truth, however, is that silver outperforms gold only during orderly and strong price advances that remain trend-bound. Once gold and silver prices achieve the wildfire stage, the blond metal can outshine its albino sibling both on the way up and especially on the way down (by falling less, of course)."

Based on his analysis of the patterns in the 1979-1980 rally and 2003-2006 (which had two interim peaks and a blow-off), Tom sees the market behaviour over 2009-2010 leading to one of two scenarios:

1.   interim peak, small correction in price
2.   blow-off, typically 25% price correction

At this stage Tom cannot commit to either scenario and is waiting for the market to establish stronger price trends. However, he does conclude that:

"the modeled relationship between gold and silver prices and the gold/silver ratio suggests silver will not outperform gold by a substantial margin in either case."

However, Tom does note that there is a

"possibility that the strong recent advance in silver prices will simply resume in short order and thereby provide impetus to a substantial further decline in the gold/silver ratio. Trend-wise we are getting long in the tooth for resumption in the price advance and therefore we will assume for now that failure to achieve new highs in silver by mid-January brings into play the scenario involving “interim peak preceding 1979-1980 or 2006 style blow-off”."

Bron Suchecki

The Perth Mint Blog