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Silver Vs Gold Stocks and Long Term Targets

By: Greg Silberman

-- Posted 13 March, 2006 | |

Itís Incredible!

Not a week goes by where a reader doesnít ask me if I prefer Silver to Gold?
Nothing occupies a Precious Metal Bug more than the Silver Gold debate.

True or False: Gold is in a Bull market but Silver, ahh Silver thatís where the HUGE money will be made!

Lets take an objective look to see how best to allocate our portfolio between Silver and Gold (stocks) over the next few years.

What is it about Gold?

There is one striking difference between Silver and Gold, Silver has industrial uses. Silver is used in photographic film, amongst other applications. Gold has almost NO industrial use. The biggest demand for Gold is Jewellery, Adornment and Investment.

So what is it about Gold? There is a mystical nature to the Metal. A primordial glitter that drives men crazy to acquire it. But for practical purposes, Gold is useless. Itís ironic; a metal with so few uses holds such psychological power.

Gold is the hitching post of the Monetary universe.

Because of its rarity and allure, Gold is seen as the ULTIMATE STORE OF WEALTH. A substance that NEVER bankrupts and ALWAYS buys something! 5000 Years of History cannot be wrong in this regard.
Silver is the poorer sister. More abundant than Gold and with some definite industrial uses, Silver holds only a tiny trace of hypnotic power and shine that Gold Commands.


Silver performs better than Gold when economic activity is expanding.

We can see this is true from the following chart:

Figure 1 - Silver: Gold Stock Ratio (red) vs. S&P500 (blue)

When the red line is rising it means that Silver Stocks (represented by Pan American Silver) are outperforming Gold Stocks (Newmont). Notice how the S&P500 (blue line) rises when the Silver: Gold Stock ratio rises (there is a 1 Ĺ year time lag). Hence Silver stocks perform better than Gold Stocks when the economy and stock market are doing well.

Now take a closer look at the Red Line:

We could be seeing a double top developing in the Silver: Gold Stock ratio. There has been a MACD crossover (red circle) in 2005 and there is divergence between the price and the RSI and MACD (green lines) Ė all pointing to the ratio stalling out.

Hereís something absolutely FASCINATING:

Figure 2 - Gold: Silver Stock ratio (red) vs Yield Curve (blue)
Note: the ratio (red) is inverted compared to Figure 1

From 1998 to 2001 we see clear out-performance of Gold Stocks against Silver Stocks. About 2 years later (2000 Ė 2003) we see a massive steepening of the yield curve (blue line) i.e. money became easier. From 2001 to 2004/5 Silver Stocks Outperformed Gold Stocks. And interestingly enough 2 years later (2003 Ė 2006) the yield curve FLATTENED i.e. money became tighter.

Whatís going on?

Gold stocks outperform Silver stocks when there is an increased PERCEPTION that growth will SLOW and the printing press cranked up. 2 years later we see exactly that, the yield curve steepens as monetary conditions RELAX and the Fed Prints away.

Silver Stocks outperform Gold stocks when there is a belief that economic activity is ROBUST and will in turn cause a tightening of Monetary conditions. And we see that also because 2 years later money becomes tighter and money supply is choked off.

What can we deduce about the future?

If as Figure 1 suggests silver stocks are topping out against gold stocks, we could be in or a few years of out-performance of Gold Stocks against Silver Stocks. Also, if 2004 turns out to be a the turning point of the ratio, roughly 2 years later (2006) is the scheduled period for the yield curve to start widening OR to put another way its time for the FED to hit the gas and PRINT AWAY! Weíre in for a period of MASSIVE monetary inflation where Gold Stocks outperform Silver Stocks AND the Stock Market performs poorly.


Figure 3 - Long Term Silver (blue) Gold (gold) and Silver / Gold ratio (red)

Using my Exponential Fib approach Iíd like to indulge a bit Ė letís project the prior wave in the last Gold and Silver Bull Markets to arrive at targets for this current Bull Market:

Silver had a low of $1.50 in 1973 and a high of $40 in 1980. Projecting forwards, Silver has a price target of $675 (40+(40*((40-1.5)/1.5)*0.618)+1). YIKES BATMAN! Thatís a 6,600% increase from current prices.

Gold had a low of $35 (1971) and a high of $850 (1980). Projecting forward, Gold has a price target of $13,000 (850+(850*((850-35)/35)*0.618)+1). Thatís a 1,400% increase from current prices.

Greg are you serious about those targets?

Silver BULLION clearly has the ability to way outperform Gold. Good Silver producers with controllable cost structures stand to make MASSIVE gains in the coming years. Clearly everyone MUST have some exposure to Silverís terrific upside even though it may not fully materialize in the NEAR future.

At this time I feel a portfolio weighting of 20% in Silver related investments is a good allocation.

More commentary and individual stock picks follow for subscribers...
-- Posted 13 March, 2006 | |

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