“Sometimes you're in great demand. Then suddenly your career hits the breaks.” - Gary Sinise
As the Summer Surprise of higher highs, persistent reflation, and the end to the end of the world trade continues, I have been receiving questions about commodities, specifically as it relates to silver (SLV) and gold (GLD). Often referred to as “poor man's gold” given that it generally trades at a discount to the yellow metal, silver relative to gold appears to have washed out. I have been noting that I believe the next wave higher for risk assets could easily be led by emerging market stocks and commodities, but within that trade, silver looks to be more sensitive to a return of growth expectations. Why? Because relative to gold, silver is used more in industrial production comparatively speaking.
With that said, take a look below at the price ratio of the iShares Silver Trust ETF (SLV) relative to the SPDR Gold Trust ETF (GLD). As a reminder, a rising price ratio means the numerator/SLV is outperforming (up more/down less) the denominator/GLD.
Silver massively outperformed gold from August 2010 to April 2011, and sharply weakened as margin requirement were increased. Much of the continuation of that weakness appears to be related to the deflation scare that picked up during the Summer Crash of 2011. Higher sensitivity to industrial demand meant that as risk sentiment turned more depressive, gold performed better simply because demand is more driven by jewelry and for investment purposes. Notice the far right of the chart, which shows that the ratio appears to have not only stabilized, but may also be in the early stages of leadership. I believe this is because expectations are increasing on industrial demand. For now then, poor man's gold may be a better trade than gold itself.Disclaimer: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.