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« Silver Standard Resources Outperforms Silver Prices | Main | Pan American Silver: Still going Strong and Steady »
Thursday
Apr052007

Gold: Will it outperform Silver?

Silver China Coin

Gold and silver are in many ways very similar metals. They have both been used throughout history as money and to store wealth with silver long being considered “poor man's gold”. Gold prices and silver prices tend to move in very similar patterns and so those who are bullish on gold are usually bullish on silver and vice versa. Gold and silver are both precious metals, along with platinum, but there seems to be a closer relationship between gold and silver than there is between the other metals, although they all have similar uses, such as being used in jewellery.

However, with the ever rapidly advancing world of technology, we are beginning to see a separation in the metals. The main change is in the increase of silver usage. Of course silver and gold have long been used in jewellery, but silver has many industrial uses such as photography, dental alloys, bactericides, solder and brazing alloys, electrical contacts, batteries, mirrors, solar panels catalytic converters and much more. The fact is that silver is becoming both a monetary metal and an industrial metal, unlike gold, which is mainly a monetary metal, jewellery aside.

So, How will this additional demand affect silver prices?

Well as far as we can see this extra demand can only have a positive affect on silver prices. More silver being used in industry means less silver on the market, which leads to higher prices being paid for the remaining silver.

When speculating on the current precious metals Bull Market, it is important to look at the history of the metals, and how they have performed in previous bull markets. In the last precious metal Bull Market, both gold and silver performed extremely well and investors would have made handsome profits in either of the metals. Nevertheless, it is important to look at which metal performed the most attractively, in order to gage which metal is to make the most significant gains this time around.

Firstly we look at what gold prices did in the boom that peaked in early 1980. In the final part of the Bull Market, gold prices shot up an incredible $620, that is equivalent to 270%, in little over a year.

Gold making all time high

Gold's gains may have been amazingly dramatic, but they were unable to match the drama that was unfolding in the silver market. Silver outperformed gold by more than double, by a factor of just over 2.2 to be precise, with silver gaining over 600% in the same period that gold gained 270% in.

Will silver do the same this time around?

Silver making all time high

We think it is unlikely that silver will outperform gold to such an extent this time around. This is mainly due to the fact that silver had the backing of the International Metals Investment Company Ltd. I can almost hear you say, “Had the backing of what?” Well this was the company set up by the Hunt brothers and their partners with the single aim of cornering the silver market. They proceeded to try and buy all the silver that they could get their hands on, therefore pushing prices to extreme heights. It is of course possible that there is another Nelson Bunker Hunt out there, plotting with his partners on how to corner the silver market, but none that we are aware of.

However, we do not think that silver will outperform gold to such an extent; we do think it will outperform gold as silver prices are beginning to do so already.

From the start of this current precious metals bull up until 2004, gold was moving steadily higher, whilst silver was following it somewhat reluctantly. But just before we entered 2004, silver started to catch up with gold's gains and the two metals performed on a pretty much equal basis from 2004 to 2006, with silver being the more volatile of the two. However during 2006 we saw silver pull away from gold, steaming ahead more viciously than had been seen before. Since then silver has outperformed gold, as the chart below illustrates.

Silver compared to gold

On the contrary it is possible that silver will go back to under performing gold, as it did in the period before 2004 or that silver will return to moving in approximately the same way as gold does. It is also worth noting that gold also has uses besides being a monetary metal and being used in jewellery. Gold has its uses in the industrial world, although not to the extent that silver has. Gold is used in many electronic components because of gold’s outstanding ability to conduct both thermal and electrical energy. The medical industry also uses a share of the gold market, consuming around 2% of supply each year. This is a fairly small proportion and is considered to be a stable demand although industry in total represent about 11% of gold demand, approximately 400 tonnes each year (average from 2001-2005). Overall however, industry puts a larger demand on silver than it does on gold and that it one of the factors that may push silver higher than gold in this Bull Market.

One thing that is also very clear is that silver prices behave with much more volatility than gold due to the fact that the silver market is considerably thinner that the gold market. This thinness of volume means that when an influx of investment capital enters the silver market, it will send silver prices higher than gold, relatively speaking, because silver is a smaller market.

In conclusion, here at www.silver-prices.net we think that silver will outperform gold, but not on the same level as it did in the last precious metals Bull Market. The driving factors will be additional demand from industry not from an attempted monopolization, although anything is possible. Therefore if you are bullish on precious metals, it might be a good idea to weight your portfolio towards silver, more so than gold. For ideas on which silver stocks to invest in, as well as commentary on the general silver market, subscribe to the Silver Prices Newsletter at www.silver-prices.net completely free of charge.

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Reader Comments (4)

Sir,

Just read your article "Gold: Will It Outperform Silver" on Kitco's commentaries. I have read just about every siler/gold posted commentary on Kitco for at least a year. This is the first commentary that discusses the relationship between the Hunt Brothers and the Short term bull silver market. Were you guys alive back then or did you research this?

By my recollection, they were forced to testify before congress about those dealings. There is no question that the very brief panic buying in silver had a lot to do with them, as did long term interest rates that were substantially higher than what we have today

Also contributing to this was a standoff with Iran over the Hostage crisis, and a sitting president that announced that the nation was in a malaise and that he had no idea how to fix it.

People analyzing the precious metals market, especially those selling their opinions, seem to have amnesia about that period between January and March 1980. Somebody should give your company an award for having the intellectual honesty to point some of those factors out in your commentary, and to not just shill for gold and silver.

Personally, I own some gold, quite a bit of silver, and Goldcorp (via the Takeovers of Western Silver by Glamis and Glamis by Goldcorp). That one post almost makes me want to spend the money to buy into your service.

Regards, Victor Voldish

April 17, 2007 | Unregistered CommenterVictor Voldish

Hi Bob,
I am curious, do you think that the fact that there is about 1/3 the
silver, twice the industrial use, ten times as much money, 3 times as
many people, a peak in the greed cycle, a huge credit bubble and the
death of fiat, will have any trouble offsetting the Hunt's. I don't
think so. This time silver is going to break all records.
However, I understand that people don't really want the truth, so it
must be dealt out in small bites. Thanks for your efforts and I look
forward to watching the price per ounce soar into the 4 digit zone.

April 17, 2007 | Unregistered CommenterDan Lucachick

Victor,

Yes I was around when gold and silver made a mad dash for the sky. I was an amateur chartist using graph paper and a pencil to chart precious metals. I watched the gold Bull Run all the way up to £800.00 and did not touch it. Only when it fell back to the $500.00 level did I make a move. The move was simply based on the premise that having fallen $300.00 there could be a bounce worth about one third of the fall. So I was looking for a $100.00 move upwards. I was young and single then, so complete with a cavalier attitude I put all of my savings into the physical metal and also borrowed the same amount from the bank as you could get margin then. (I was working in Holland at the time) So I ended up with a good win, but I would not dream of doing that sort of thing now, well not while the wife is watching!

I do recall the congressional hearings and I think that it was Nelson Bunker Hunt who was on the stand at the time and he was asked how much he was worth? He replied that he did not know! So they continued to press him on the issue of his wealth and he said something along the lines of: Look if you know what you are worth you sure aint worth much! I laughed so much there were tears rolling down my cheeks.

Silver is still a small market sector and could once again attract a person with enough wealth to corner the market.

April 17, 2007 | Unregistered CommenterSilver Prices

Dan,

We also have the Internet so any movement or news that affects silver is now flashed around the world in a nano second. There is also the rapid increase in web based trading: no more telephone calls to place an order with your broker then wait three days for a confirmation only to find that it was wrong. This time will be faster and much more volatile than anything we have seen in the past.

April 17, 2007 | Unregistered CommenterSilver Prices

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