Silver: First A Dive, Then A Spiral

Happy days are here again in precious metals! Did you hear? There is a “rally” taking place at the moment. Yes, the price of gold has rallied all the way back to where it was at the end of 2009. The price of silver has rallied all the way back to where it was in the middle of 2009. Woo-hoo!

For those readers who don’t think that returning to the prices of seven years ago, and recovering a tiny portion of the (nominal) price gains that have been lost in recent years qualifies as a rally, this commentary is for you. Readers have already been informed that the current “rally” is a fake-rally, for obvious and persuasive reasons. At the top of the list was silver’s failure to “lead the way” during the first two months of this pseudo-rally. This is impossible, for two reasons.

1) The silver market is much smaller than the gold market.

2) The silver market is much more volatile than the gold market, meaning prices rise faster on the way up, and fall faster on the way down.

Dealing with (1) first, in general terms the silver market must always outperform the gold market in any legitimate rally because of its size. It requires only a tiny fraction of the amount of capital going into gold to cause a much larger price response in silver. This principle of simple arithmetic is even more obvious given that at the start of this pseudo-rally the gold/silver price ratio was at an ultra-absurd level of 80:1.

What this means is that even if only 1.5% of the total money entering this sector went into silver that the rise in the price of silver would have had to exceed that of gold (in proportionate terms). Are we really to believe that for two, solid months of a “precious metals rally” that more than 98.5% of the money went into gold, and less than 1.5% went into silver? Right.