With the incredibly sharp decline in precious metals in just the past few days, I wanted to put a spotlight on silver relative to equities and suggest reasons for why there has been such a powerful move lower.
First, consider that silver has strongly outperformed the S&P 500 going back three years.
However, this year has not been kind to investors betting that silver was a better place to invest than the stock market despite concerns over a systemic collapse in financial markets.
The easiest way to see the longer-term outperformance of gold relative to stocks is to take a look at the price ratio of the iShares Silver Trust ETF (NYSEArca: SLV) against the iShares S&P 500 (NYSEArca: IVV).
As a reminder, a rising price ratio means the numerator/SLV is outperforming (up more/down less) the denominator/IVV.
Silver has had two immense breakdowns with the first starting towards the end of April, and second in late September.
Part of this does indeed have to do with margin requirements being hiked, but I suspect there is more at play than this. First, consider that the world is thirsty for dollars given the European crisis and funding/liquidity concerns. This makes dollar-denominated commodities underperform when there is a strong U.S. dollar.
More so than that though, if the world is headed into deflation, then can silver outperform sustainably? One of the reasons often cited by investors in precious metals is that it is a hedge against inflation.
Yet it is now becoming abundantly clear that deflation is a far bigger threat thanks to the European sovereign debt crisis. But what about the idea that silver will act like gold as an insurance policy against a systemic collapse? Price action does not seem to suggest this is likely to happen to the global financial system if that’s the case.
Is there a bottom in sight? We’ll only really know looking backward, but I find it hard to believe animal spirits will return to silver with the incredible declines its experienced all year.
The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.