We most recently discussed the long-term performance of the gold/silver ratio only two months ago, but the subject is sufficiently important to warrant some repetition. So, without further ado and with reference to the following monthly chart, here are the main points we made in our 4th February commentary: First, silver tends to perform better than gold -- causing the gold/silver ratio to decline -- during the late stages of intermediate-term precious-metals rallies and especially during the late stages of cyclical precious-metals bull markets. It does so for the same reason that highly-speculative junior gold-mining stocks tend to be much stronger than their larger/lower-risk counterparts during the late stages of multi-year advances. As a rally progresses, speculators are emboldened to take more risk and go further down the food chain in search of the proverbial killing. Second, over the past 50 years gold has performed better than silver -- causing the gold/silver ratio to rise --during the first two years of each cyclical precious-metals bull market that has occurred within a secular bull market. Specifically, gold outperformed silver from mid-1971 through to mid-1973, from mid-1976 through to late-1978, and from early-2001 through to mid-2003 (the three periods shown in the boxes labeled A, B and C on the following chart). Third, 50-65 now appears to be the normal range for the gold/silver ratio. Spikes in the ratio to below 50 now indicate that silver is 'overbought' relative to gold on a long-term basis and that a precious-metals rally is in its final phase, whereas rises in the ratio to above 65 suggest that the entire precious-metals sector is 'oversold' on a long-term basis and that investors with a timeframe of at least two years should be favouring silver over gold. The fact that the historical record shows gold outperforming silver during the first two years of new cyclical bull markets implies that if a new cyclical bull market began in late-June of 2013 (we strongly believe it did) then silver will maintain a downward bias relative to gold until the second half of next year. However, the ratio ended last week at the top of its normal range -- a level where silver is 'oversold' relative to gold on a long-term basis and a lot higher than it was in the early stages of the previous cyclical bulls. This suggests that long-term investors should now have a bias in favour of silver. It is also worth pointing out that silver is now 'oversold' relative to gold on a short-term basis, as indicated by the low level of the RSI shown at the bottom of the following daily chart of the silver/gold ratio. Our conclusion is the same as it was two months ago: we are long-term neutral on the gold/silver ratio near its current level at the current early stage of a new cyclical precious-metals bull market. That being said, for our own account we continue to be more interested in accumulating silver bullion than gold bullion, solely because we have a lot of equity-related exposure to gold and very little equity-related exposure to silver.
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