Silver v. Gold

Today, crude and gold prices broke into unchartered territory; they are rallying into the Asian markets as I write. For those who have missed this massive rally since August, there may not be a pullback for a while. Trade volume for crude and gold have surged during the past couple months as smart money (inflation up, buy gold) began piling in. Last week's positive employment and retail data put pressure on gold, but every time there was a pullback buyers came into lift the offer, holding support at $730/oz.

Despite gold's rally today, Silver was down, failing to break resistance at $14.100/oz. Of course, gold is the go-to inflation hedge, and gold probably has better fundamentals than silver. But silver's relative under-performance is disappointing because the last time serious money poured into precious metals (early 2006), silver led the charge (shown below). The silver-to-gold ratio has waned during the past year as both metals consolidated, but the ratio may be ready for a flip as increasing capital flows into the much smaller silver market may have a greater positive effect on silver prices than on gold prices.

The other side of the argument (gold is better than silver) presents pretty convincing empirical evidence, showing that silver outperforms gold when there is confidence in financial assets. This seems relevant right now, as risk appetite in financial assets is still sensitive to ongoing housing market deterioration and future fed rate decisions. If silver is going to prove itself more worthy, now is the time to do it.

[Silver:Gold]