Thus far, it’s been a volatile Q2 for the precious metals. Silver has traded in a 13% range since the start of April, with most of the volatility to the upside. This outperformance has helped silver to regain some ground vs. the S&P-500, underperforming the index just over 900 basis points year-to-date but still lagging last year’s outperformance. Fortunately, the one area silver is leading is relative to gold, a great sign for the precious metals. Generally, the precious metals perform much better when silver is leading, and typically, pullbacks with a bullish silver/gold ratio are simply violent corrections and not the start of new bear markets. Let’s take a closer look below:
As shown in the chart below, the silver/gold ratio continues to remain in a strong uptrend since Q3 of last year and is now within a stone’s throw of a new 52-week high. This outperformance during the recent 8-month correction in miners and metals suggests that there’s no reason to give up on hopes of a new bull market in metals because silver continues to lead by a wide margin. At previous cyclical and secular tops, silver has typically broken down and starting making new lows vs. gold, and this is not what we’ve seen recently.
We saw this during April of 2011 as silver made a new 30-day low while gold was continuing its march to new highs. This was a canary in the coal mine for the eventual new highs gold would make three months later in August, suggesting the rally was not sustainable.