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Is Silver Really a Better Buy Than Gold?

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  • While gold has blasted off to new 5-year highs, silver has been unable to even break its downtrend line.
  • Silver continues to be the lagging metal by a significant margin and is significantly underperforming the S&P-500.
  • Based on this under-performance, I believe gold is the much better option until this relative weakness begins to change.

With Jerome Powell’s comments yesterday reiterating his stance that he’s open to rate cuts, it’s no surprise that gold got yet another bump and is solidified itself back above the $1,400/oz level. Inflation is great for gold, and the most recent shift from rate hikes to cuts has given a bullish tailwind to the metal. Unfortunately, for those investors who have parked themselves in silver, the reaction has been much more muted.  While gold is up double-digits for the year and has broken out of five-year highs, silver is still showing a negative return year-to-date and hasn’t even managed to break out of its intermediate downtrend. The die-hard silver bulls will have you believe that silver must play catch-up and is the much better buy here, but I’m not so sure I agree with that.

When it comes to positioning on a macro basis, there are three markets I watch, which dictate how I am positioned and to what weighting. I want to be long the strongest of the three assets and overweight it, and either underweight or entirely out of the weakest assets. To assess this, I use relative strength work to see which asset class is performing the best between the S&P-500 (NYSE:SPY), Silver (NYSE:SLV), and Gold (NYSE:GLD). Outside of a brief period in 2016 when I was long gold and the S&P-500 equally, both metals have been poor investments when compared to silver for most of the past decade. While we are seeing a change in character and a potential trend change for gold relative to the S&P-500, silver is still miles away from correcting its relative under-performance. Let’s take a look below:

Looking at the above chart I’ve built of Gold vs. the S&P-500, gold briefly shot above its key moving average in late 2018 and is now challenging that level again. The fact that it is making higher lows vs. the S&P-500 and trying to put together a trend reversal suggests it is worth considering as an asset class in one’s portfolio as well as either the S&P-500 or a basket of large-cap stocks. However, as we can see in the second lower chart above, silver has been a terrible investment vs. the S&P-500 and is not even remotely close to any form of a trend reversal. This suggests that while a portfolio long the S&P-500 and Gold or the Gold Miners Index makes sense, the inclusion of silver makes much less sense at this juncture and is not necessary.

As we can see from the below weekly chart of silver, the metal has multiple layers of resistance, beginning with lower resistance at $16.25/oz, and stronger resistance at $18.45/oz. Meanwhile, gold has trounced all its crucial resistance levels and instead has support levels stacked below at $1,325/oz and $1,274/oz. Until silver can get through crucial resistance at $16.25/oz, I would view any rallies as only noise as they are occurring within an intermediate downtrend, and I would expect this relative underperformance vs. the other two asset classes to continue.

But… the silver bulls said that silver has more leverage, is cheaper, and must play catch-up and is overdue to outperform gold. While this might be the prevailing babble, the truth is that gold significantly outperformed off the 2001 lows, and those overweight silver would have underperformed substantially. As the below chart I’ve built shows, gold bottomed in February 2001, but silver didn’t bottom until nine months later in November 2001. From the beginning of 2001 through to the end of 2003, gold gained 56%, while silver gained a mere 39%. However, this underperformance was even more drastic in the 18 months following gold’s bottom, with gold putting up a 25% return in 2002, and silver putting up a dismal 5% return. It was not until Q4 of 2003 when silver made a new 52-week high and began outperforming gold on a quarterly return basis that things finally swung in silver’s direction. Given the fact that silver is still miles away from a 52-week high and is still under-performing gold on a quarterly basis, there’s still no sign that this trend is ready to reverse.

For those looking to accumulate more silver for their portfolios, the best course of action is waiting for silver to at a minimum begin to out-perform gold on a quarterly return basis, and get back above the $16.25 level on a weekly close to suggest it’s finally breaking out of its intermediate downtrend. The first sign of a change of character would be a weekly close above $16.25/oz for silver, until then, we’ve got a tug of war between the bears and bulls. While gold clearly remains a hold as it’s charged through five-year highs with ease, silver is lagging materially and there’s no suggestion it’s ready to play catch-up just yet. I continue to remain very bullish gold medium-term and long-term but remain neutral on silver until we can see some sort of trend reversal. For the time being, I favor gold and the S&P-500 as asset classes in my portfolios vs. silver which is struggling to even hold par.

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