GSR and other ratios

[vand]

Silver is starting to catch up in a serious way now.  The GSR is now down to 93.7, from it's peak of 126 only 4 months ago.

I maintain that at these levels, precious metals investors should be buying at least as much silver and platinum as they are gold. 

 

[vand]

Silver still showing good strength, and actually behaving like you'd expect of a precious metal rather than a commodity.  GSR now down to 92.  

Our patience in silver will be rewarded!

[Happypanda88]

It's certainly moving towards the 2019 mean .......with urgency too !!

One market analyst often say - if silver is pressed deeper and deeper into the water like a beach ball, then when released it will have an almighty rebound! 

So let's sit back and watch ☺️

[DarkChameleon]

I see 80-1 coming soon, gold is rising be it slowly, silver is playing catch up quickly, $3 rise in a week.

[Happypanda88]

In the latest interview with Greg Hunter, Bill Holter is calling G:S ratio down to 50:1 by year end ! 

So if gold price stays around 1900 USD, then silver will be at least 38 USD.

[DarkChameleon]

On 21/07/2020 at 09:46, DarkChameleon said:

I see 80-1 coming soon, gold is rising be it slowly, silver is playing catch up quickly, $3 rise in a week.

Got it bang on....for my next trick ill say 75 within the next two weeks.

[vand]

Well it has been fun going back a few pages and reading everyone losing their heads in March.. some even stupidly wanting to swap the silver for gold. 

If you felt that way then NOW is a much better time to do it with the GSR around 80. I think it will collapse closer to 30-40 over the next few years, but by swapping some now you will have a smoother ride and that is probably worth doing if you were one of those who couldn't handle the March madness. 

 

Personally I am not not swapping anything just yet. The next swap I expect to be doing will be swapping some of my silver to gold when GSR is sub-50. 

[KDave]

4 minutes ago, vand said:

Personally I am not not swapping anything just yet. The next swap I expect to be doing will be swapping some of my silver to gold when GSR is sub-50. 

I don't understand this. When I compare chart GSR to price levels, lows in the GSR indicate a top in precious metals (both gold and silver) and falls in both over the following years, hence swapping silver for gold at that point would be a losing game. Have I missed something? 

[Shinus73]

12 minutes ago, KDave said:

I don't understand this. When I compare chart GSR to price levels, lows in the GSR indicate a top in precious metals (both gold and silver) and falls in both over the following years, hence swapping silver for gold at that point would be a losing game. Have I missed something? 

In 2011 it would certainly have been a better move to sell everything at the peak for silver and buy back gold 12 months later, rather than swapping silver for gold at the GSR low.

[vand]

12 minutes ago, KDave said:

I don't understand this. When I compare chart GSR to price levels, lows in the GSR indicate a top in precious metals (both gold and silver) and falls in both over the following years, hence swapping silver for gold at that point would be a losing game. Have I missed something? 

Its simple - people lose their rationality at moments of panic and want to liquidate into perceived more stable assets at exactly the worst time to do so. That is why we often see people liquidating to cash near market bottoms. 

 

Silver is riskier than gold because its more volatile. People only discover what risk means when the market tests their resolve like it did in March. If that felt uncomfortable to anyone then its a sign that they are carrying too much risk. I have written about risk as the other side of the coin to reward many times. The craft of investing is to ideally balance them. 

I can guarantee that when GSR reaches the other extreme we will have people wanting to sell their gold and put it into silver because they are chasing the return without any regard for the risk.

[KDave]

21 minutes ago, vand said:

Its simple - people lose their rationality at moments of panic and want to liquidate into perceived more stable assets at exactly the worst time to do so. That is why we often see people liquidating to cash near market bottoms. 

 

Silver is riskier than gold because its more volatile. People only discover what risk means when the market tests their resolve like it did in March. If that felt uncomfortable to anyone then its a sign that they are carrying too much risk. I have written about risk as the other side of the coin to reward many times. The craft of investing is to ideally balance them. 

I can guarantee that when GSR reaches the other extreme we will have people wanting to sell their gold and put it into silver because they are chasing the return without any regard for the risk.

Yes I understand that, its a fair point if silver had more to run and it does lag gold by a few months. However looking at the yearly charts, the previous GSR lows have coincided with the top in both the gold and silver price. Swapping one metal for another at the price top in the precious metals complex, why is it a good idea? What am I missing.

[vand]

I have updated my ratio and scatterchart plots to reflect latest data.

First, Dow vs Gold:

 

 

 

Based on a regression of monthly data:

There is a very loose correlation between current Dow/Gold ratio and subsequent 5yr relative returns (26%)
There is a good correlation between current Dow/Gold ratio and subsequent 10yr relative returns (55%)

We can guess the Dow and Gold prices to be roughly the same relative to each other in 5 years' time, but with not much certainty
We can expect The Dow to outperform Gold by 2-3%pa over the next 10 years, with quite strong certainty

 

Maybe not what goldbugs want to hear, but gold looks pretty fully price at these levels compared to its historic long run average.

[vand]

Gold vs Silver:

 

 

 

Based on a regression of monthly data:

There is a loose correlation between current Gold/Silver ratio and subsequent 5yr relative returns (36%)
There is a good correlation between current Gold/Silver ratio and subsequent 10yr relative returns (63%)

Over 5 years our best guess is that silver will outperform gold by 1.5 - 2%, but we can't make this with any degree of conviction
Over 10 years we can have better confidence that silver will outperform gold by about 2 - 2.5% pa.

Because of gold's long term rise against silver (and other PMs), it's very difficult to buy silver at a price where you can be confident that it will outperform gold over the following 5-10 years by any substantial amount. The March madness where GSR hit 100+ was a good window where this was the case. Today with GSR at 80, a lot of those expected return have already been realised. Silver still has the edge, but it is only small one at this price.

 

 

[vand]

Gold vs Platinum:

 

 

 

OK, things get really rather crazy here. The price of Platinum is so low compared to gold that there basically no data between where we currently sit and where the previous most extreme readings where. The linear regression may not be - indeed, almost certainly isn't - the best method to extract a best fit here.

So, all I will thus say is that the current ratio is so crazy that I would be amazed if over the next 5-10 years platinum doesn't outperform gold by as much as it ever has historically over that same timeframe.

 

 

 

 

 

[vand]

OK, so we know Platinum off-the-charts cheap compared to gold. How does it look against its sister white metal, Palladium?

 

 

 

 

Although Platinum is arguably even more undervalued against palladium than it is against gold, we do have precedent for these extreme sort of swings in price between these two metals - look at how the ratio has swung by a factor of around 10 peak to trough through several cycles!

Despite that, because of the difficulty in pinning down the exact timing of the cyclicality, the 5 and 10 year relationships between Pt/Pd and  relative performance are only loosely correlated. So while our expectation is that Platinum will perform very strongly against Palladium, we can't hold this with any sort of strong conviction and must be prepared for a wide range of outcomes.

 

 

 

[vand]

Lastly, let's look at Silver vs Platinum, a metal that is mildly undervalued versus a metal that looks like it's undervalued by at least 4 standard deviations.

 

 

 

 

The correlation coefficients are higher between silver & platinum than they are between palladium and platinum. On a 10 yr basis the correlation is actually reasonably strong 63%.

At the current Pt/Ag ratio of around 39, over a 5 year subsequent time period platinum outperformed by an average of about 3%, although note that there are still some cases where silver still outperformed.

However given 10 years to play out, platinum's advantage becomes strong and goes on to outperform by an average of about 7% a year, with no recorded cases where silver has managed to beat it.

[vand]

So, conclusions?

- Don't be very surprised to actually see gold failing to keep up with the Dow Jones over the next 5-10 years. Gold looks relatively fully priced on a decade long timescale. Of course, I'm not saying you shouldn't own gold or even be oveweight in it due to your macro outlook, but from a historical valuation perspective it cannot be said to be undervalued.

- Silver remains mildly undervalued and it's worth holding some.

- Palladium is horrendously expensive. Of course in the next year or two it might get even more expensive, but under no model can I see how it will not be outperformed by all the other precious metals over the next decade. 

- Platinum is by far the most undervalued precious metal right now.  If you want the best risk/reward play in the sector then pile your money into platinum.

[DarkChameleon]

8 hours ago, vand said:

Well it has been fun going back a few pages and reading everyone losing their heads in March.. some even stupidly wanting to swap the silver for gold. 

If you felt that way then NOW is a much better time to do it with the GSR around 80. I think it will collapse closer to 30-40 over the next few years, but by swapping some now you will have a smoother ride and that is probably worth doing if you were one of those who couldn't handle the March madness. 

 

Personally I am not not swapping anything just yet. The next swap I expect to be doing will be swapping some of my silver to gold when GSR is sub-50. 

I have a deal on with my lcs thatifhegets me a nice 1920 double eagle $20 coin ill swap him silver ratio for it, i know it cost more for a gradable coin and the exchange rate is probably going to drop as people invest in silver more then gold if theyre not loaded...but its my grandsons first coin so ill take the hit, its cost him 5oz silver for not getting it in the last week...lol.

[DarkChameleon]

8 hours ago, vand said:

Its simple - people lose their rationality at moments of panic and want to liquidate into perceived more stable assets at exactly the worst time to do so. That is why we often see people liquidating to cash near market bottoms. 

 

Silver is riskier than gold because its more volatile. People only discover what risk means when the market tests their resolve like it did in March. If that felt uncomfortable to anyone then its a sign that they are carrying too much risk. I have written about risk as the other side of the coin to reward many times. The craft of investing is to ideally balance them. 

I can guarantee that when GSR reaches the other extreme we will have people wanting to sell their gold and put it into silver because they are chasing the return without any regard for the risk.

Risk and reward are two sides of the same coin, experience gives you the edge...lol.

[DarkChameleon]

8 hours ago, vand said:

Its simple - people lose their rationality at moments of panic and want to liquidate into perceived more stable assets at exactly the worst time to do so. That is why we often see people liquidating to cash near market bottoms. 

 

Silver is riskier than gold because its more volatile. People only discover what risk means when the market tests their resolve like it did in March. If that felt uncomfortable to anyone then its a sign that they are carrying too much risk. I have written about risk as the other side of the coin to reward many times. The craft of investing is to ideally balance them. 

I can guarantee that when GSR reaches the other extreme we will have people wanting to sell their gold and put it into silver because they are chasing the return without any regard for the risk.

I offerred up some of my gold a while back and nobody took the deal, one full sovereign for a tube of 20 ases....nobody took it...id have been about $100 up on the deal now but that was when gold was 100 -110 ratio...i think too many are frozen when the time comes to put your pms whereyour mouth is, which is why so many got burnt in 2011 wheh they bought silver at $40 or even $30 /oz then it hit $45 and over, and even when it hit $30 to taketheir bruises and move on, then watched it go down to $14 and $12 and now they are in the frozen zone yet again...lovingbthe move but too afraid to do anything about it.

[Martlet]

2 hours ago, vand said:

- Platinum is by far the most undervalued precious metal right now.  If you want the best risk/reward play in the sector then pile your money into platinum.

I dont see where this conclusion comes from, looks like its based on assumptions it should be worth more, or compared to gold.  The primary use for platinum is catalytic converters, easily and widely recycled, and likely to decline in use due to transition to electric vehicles, so lowering demand.  What is the case for increasing platinum value? 

[vand]

1 minute ago, Martlet said:

I dont see where this conclusion comes from, looks like its based on assumptions it should be worth more, or compared to gold.  The primary use for platinum is catalytic converters, easily and widely recycled, and likely to decline in use due to transition to electric vehicles, so lowering demand.  What is the case for increasing platinum value? 

I'm not making a fundamental case for it being higher, I'm just looking at it from a quant basis.  

[Kman]

 

2 hours ago, vand said:

- Platinum is by far the most undervalued precious metal right now.  If you want the best risk/reward play in the sector then pile your money into platinum.

This is the first time I've heard some mention platinum, looking at a weekly chart it does look very interesting

If I can break out above $1000, show support then  that might be a good spot to buy and see where it goes

are you using an etf?

[Lindeman]

On 27/07/2020 at 15:14, vand said:

Palladium is horrendously expensive. Of course in the next year or two it might get even more expensive, but under no model can I see how it will not be outperformed by all the other precious metals over the next decade. 

Indeed...hence the microeconomic question I posed the other day on whether to sell my single palladium 1 oz to buy gold instead, or to sit tight and wait.  The Pt / Silver ratio was also an interesting one @vand - thanks for sharing the graphs.  If Pt drops back to $875 may be tempted to buy a bit more.  

[vand]

On 27/07/2020 at 14:31, vand said:

Gold vs Silver:

 

 

 

Based on a regression of monthly data:

There is a loose correlation between current Gold/Silver ratio and subsequent 5yr relative returns (36%)
There is a good correlation between current Gold/Silver ratio and subsequent 10yr relative returns (63%)

Over 5 years our best guess is that silver will outperform gold by 1.5 - 2%, but we can't make this with any degree of conviction
Over 10 years we can have better confidence that silver will outperform gold by about 2 - 2.5% pa.

Because of gold's long term rise against silver (and other PMs), it's very difficult to buy silver at a price where you can be confident that it will outperform gold over the following 5-10 years by any substantial amount. The March madness where GSR hit 100+ was a good window where this was the case. Today with GSR at 80, a lot of those expected return have already been realised. Silver still has the edge, but it is only small one at this price.

 

 

•  

 

Fair valuation for silver is GSR somewhere around 65-68

With GSR currently sitting at 73, I consider silver to be almost fairly valued. I'd expect it to outperform gold by 1-2% over the next 5-10 years but as of now most of the gains to be expected from regression to the mean have already happened.