Bipolar Silver: How to Profit
It is often said that those who are ignorant of history are doomed to repeat it. It’s also said that while history never repeats exactly, it sure rhymes a lot. So, while looking at previous bull markets doesn’t prove anything about the current one, it does offer a reasonable basis for guiding expectations. This is what Jeff and Alena have done in the article below, as regards volatility in silver and gold prices. Their conclusions are well worth taking to heart.
And finally, one last note – today marks the 500th alert to be issued in the near 20-year history of Casey Investment Alert, our premium precious-metals alert service. Normally, these alerts are available only to subscribers of this elite service, but in honor of this proud moment, we’re making it available to you. Click here to access your free copy.
Senior Metals Investment Strategist
|Rock & Stock Stats||
One Month Ago
One Year Ago
|Gold Producers (GDX)||42.32||44.65||55.54|
|Gold Junior Stocks (GDXJ)||18.51||20.02||28.71|
|Silver Stocks (SIL)||21.11||22.06||24.76|
|TSX (Toronto Stock Exchange)||12,801.23||12,504.81||12,521.02|
By Alena Mikhan and Jeff Clark
Most precious-metals investors know that silver is more volatile than gold. But do they know just how big that difference really is?
We thought it would be interesting to measure how much greater silver’s daily moves are – both in gains and declines – than gold.
We documented the daily price movements for both metals, and then calculated the difference using absolute values. To interpret the charts below, you need to know that:
- Values above zero represent days when silver had a greater percentage move than gold, as depicted in gray.
- Values below zero are days when gold moved more than silver, as depicted in orange.
- The values don’t tell us the direction of price movements, only how much they differed between each other on any given day.
- The darker horizontal lines represent the moving average of the price differences for each metal.
With that in mind, here are the differences in daily price movements between silver and gold, measured in percentage points.
(Click on image to enlarge)
The chart is very busy, but it clearly shows that silver’s daily price movements, more often than not, have been greater than gold’s. In fact, from January 2003 through last week, silver’s movements were larger 71.5% of the time. Regardless of the direction of precious metals on any given day, silver had a greater percentage move than gold roughly three out of four days.
Further, you’ll notice that the magnitude of silver’s movement have been much greater, too. On average, silver’s price movements exceeded gold’s by 1.3 percentage points, while on days gold had the bigger move the average was 0.81 percentage points. The moving averages easily show this.
Here are some of the more extreme examples. On May 12, 2011 (silver’s biggest spike in the chart), gold rose 1.23% – but silver soared 17.05%. The biggest difference between the two precious metals occurred on December 2, 2008; gold rose 0.26% to silver’s 5.05% decline.
So, is this greater volatility in silver normal? And what might we expect when the Mania Phase of this bull cycle kicks in?
The following chart maps the daily difference in price movement between gold and silver from January 1971 through December 1980.
(Click on image to enlarge)
In the last big precious-metals mania, silver also logged bigger one-day movements than gold, in this case 63.5% of the time. On average, silver gained or lost 1.41 percentage points more than gold. When gold outperformed silver, roughly one-third of the time, the average percentage-point difference was 0.81.
You’ll notice another interesting point. When the market entered the Mania Phase, silver’s bigger one-day movements over gold’s grew even bigger. During the 1979-1980 period, silver outperformed gold by an average of 2.46 percentage points, almost double what it did before the mania. In contrast, gold’s average remained the same during the entire decade – 0.81.
Some of the more extreme examples include September 18, 1979, where gold rose by 6.82% and silver soared 36.59%; and March 27, 1980, where gold fell 4.38% and silver dropped 18.58%.
What Are the Implications for Investors?
On average, silver rises higher and falls further than gold. This is true as much today as it was in the 1970s. The difference has reached as much as 15 percentage points during this cycle, while it hit 30 during the last mania. This means that investors:
- Must be able to stomach the bigger moves, regardless of the direction. If you have a tendency to get emotional about your investments, you may want to reduce your exposure to silver.
- Have an opportunity to get better prices on silver than gold. If you buy during the downdrafts, you will likely reap a bigger percentage gain than gold, as history has shown.
The historical record tells us that when we enter the mania, silver’s volatility will increase. If we have a similar period as in 1979-’80, we can reasonably expect volatility to double over current levels. This will be the result of more investors joining the precious-metals industry. The moves will, on some days, be breathtaking. So again, one must be prepared emotionally to handle the volatility, as well as be more nimble when it comes to buying and selling.
Since current volatility is roughly half what it was during the last mania, we have yet another piece of evidence that indicates we’re not in a bubble. Yet. Ignore those who claim otherwise; you still have time to enter this market.
It also means that when silver resumes its uptrend, the producers will outpace the metal by a wide margin. The “snapback” in silver stocks should be tremendous – but not every company will benefit equally, as not all producers have the same profit potential, political exposure, management prowess, and growth prospects.
China’s gold imports from Hong Kong jumped 94% in 2012 to a record high of 834.5 tonnes (26.8 million ounces), from 431.2 tonnes (13.9 Moz) in 2011, confirming that demand remains powerful.
The World Gold Council is widely expected to confirm that China overtook India as the world’s top gold consumer in 2012. Another reason it’s likely is that the Indian government continues its harsh measures to curb gold demand.
Besides increasing gold imports, China’s gold production grew by a robust 11.7% in 2012, reaching 403 tonnes (12.9 Moz). China thus kept its ranking as the world’s largest gold producer for the sixth consecutive year.
Gold ETFs in India Touch 40 Tonnes (Mineweb)
While the Indian government continues inventing new methods to restrain gold imports, investors can still turn to gold-backed exchange-traded funds (ETFs) to get exposure to the yellow metal. The ETFs allow investors to trade gold-backed assets in a nonphysical form via stock exchanges.
The first ETF appeared in India about six years ago. Fourteen gold ETFs are available now, with total holdings amounting to 40 tonnes (1.3 Moz) of gold.
India’s ETF holdings are only about 10% of the 398 tonnes (12.8 Moz) of gold the country imported in the April-October 2012 period. The opportunities are ripe for this type of gold investment to gain more traction if Indian authorities continue their interventions.
Scientists Discover Midas Bacteria (Mining.com)
A group of scientists at McMaster University in Hamilton, Canada, discovered a bacterium that turns toxic, water-soluble gold into microscopic nuggets of the metal.
The scientists studied how this microorganism produces molecular-sized gold substances outside its cell wall. They concluded that “the answer lies in a molecule excreted by the microbe that both shields the organism and transforms the poisonous ions into particles. In other words, it protects itself by turning its environment to gold.”
Among the ideas of how these findings may be applied to commercial use is the possibility of using bacteria to seed waste-drop piles, leave them standing for years, and then see if bigger gold particles have formed and can be recovered.
- One of our favorite exploration teams delivered solid drill intercepts from its gold property in Nevada. In our book, the company is a Best Buy.
- A development-stage company is on schedule and on budget to start producing gold this year. We consider this one a Best Buy, too.
- One of our newer recommendations provided an impressive update on 2012 as well as their expectations for 2013. As a result, we recommend buying final tranches now.
- Big news from this popular silver company – here’s what we think.