Don't Be Fooled by the Silver Boost
Despite the recent spike in silver prices, equities are likely still the better play.
Don't bottom fish.
-- Peter Lynch
I noted in a prior article here on Minyanville that I did not believe the decline was over just yet in precious metals, and that we could be entering a period where "paper beats rock" as bonds and stocks begin to potentially sustainably outperform metals. (See Gold and Silver Weakness Not Over.)
With the spike up in silver prices as 2012 begins, it's easy to believe that a resumption of the uptrend in "poor man's gold" returns right here, right now. I remain skeptical that this is the case, though, unless a longer-term period of reflation is in the cards.
Take a look below at the price ratio of the iShares Silver Trust ETF (SLV) relative to the S&P 500 (IVV). As a reminder, a rising price ratio mean the numerator/SLV is outperforming (up more/down less) the denominator/IVV.
Click to enlarge
Note that the tremendous outperformance in silver got completely undone by the end of 2011. Despite the spike in the ratio on the far right of the chart though, the trend still very much looks down. What this means is that if you're bullish on silver, you should be much more bullish on equities, as silver's underperformance trend appears likely to continue. I will take this a step further by stressing the possibility that the above ratio goes all the way back to 2010 levels.
What could cause such substantial weakness in silver? The answer is silver's history itself. Notice that 2011 was a heartache year for investors in silver. There were two tremendous knockdowns between the collapse in late April and sharp crashlike move in mid-September. Because the two declines happened so close to each other, it is doubtful animal spirits and excitement will return any time soon. Once burnt, twice shy, thrice stay far, far away. And besides, wouldn't you rather invest early in a new leader than late in an old one?
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