Gold and Silver Weakness Not Over
Gold and silver remain relatively weak, and stocks are likely to continue outperforming precious metals in the near-term.
Despite a nice recovery happening intraday in gold (GLD) and silver (SLV), I remain unconvinced that a new uptrend is about to begin in the precious metals space. I say this for a number of reasons. First, if you bought precious metals for inflation protection, it should be very clear that the world faces a significant deflationary entrenchment risk thanks to sovereign debt and austerity measures taken in Europe. Second, if you bought gold/silver as "insurance" against a collapse in the system, the idea needs to be revisited given that the world is arguably more strained now than ever before in recent history, yet with no coinciding spike in precious metal prices. The ultimate insurance against an end-of-the-world scenario is your own skill set and desire to survive, not a metal.
Having said that, forget those reasons entirely and let's focus on the relative price ratios of gold and silver each relative to the S&P 500. Take a look below. As a reminder, a rising price ratio means the numerator/GLD/SLV is outperforming (up more/down less) the denominator/IVV.
Gold vs. S&P 500 – Still Trending Lower
Comments: This looks to me like we are still in the early stages of unwinding the immense strength that occurred during the Summer Crash. The trend is not your friend, as the ratio above continues to mean that for the near-term, paper (stocks/bonds) beats rock (gold).
Silver – Deep Weakness
Comments: Like gold, silver appears to be in an entrenched relative downtrend. In addition, the two massive knockdowns in late April and September likely will make a certain class of investors shy away from buying again any time soon, something in Behavioral Finance known as the "snake-bite effect."
The Bottom Line?
Investing should never be an emotional endeavor, and for now, it appears that gold and silver are not the ideal areas of the market to invest in given relative strength occurring in equities despite tremendous volatility worldwide.
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