Silver – Gold’s Powerful Bull-Market Ally

In 2016, we’ve seen gold flourish as a safe haven for investors fleeing stock market uncertainty, global debt and deflation and the anxiety-induced currency fluctuations kindled by Brexit. All told, the shiny metal has had an impressive run, up almost 25% through yesterday.

But during its remarkable climb this year, gold’s record has been spectacularly outpaced by that of its sister metal, silver. The gray metal is up almost 46% during the same period. According to yesterday’s International Business Times, silver reached its highest price ($20.42 as of that writing) since July 2014. In fact, some analysts are calling for it to soon test $25.00 per ounce.

The outlook for both gold and silver now appears excellent.  The IBT quotes Nikolas Xenofontos, Director of Risk Management at easyMarkets:

 “The dramatic rise in precious metals following the Brexit vote is attributed to expectations for continued low rate stimulus by the US Federal Reserve.

“Britain exiting the 28-member EU all but guarantees that the Fed will not raise interest rates anytime soon. It also means the Bank of England is likely to ease monetary policy in the short term.”

Historically, when gold performs well, silver performs even better. Primarily this is because, as CNBC noted Monday, silver is an industrial metal and, as such, is more closely linked to global growth. According to the Silver Institute, it’s “an essential component in nearly every industry,” used in batteries, air conditioning, automotive manufacture and many other applications, including the booming solar panel and consumer electronics sectors.

Interestingly, Oppenheimer technical analyst Ari Wald views silver’s robust performance as a sign investors are once more embracing risk. In fact, he views its aggressive activity as a reliable predictor of a surge in the stock market: “It confirms our view that … the S&P 500 is setting up for new highs over the next coming months.”

I don’t know.  When someone paid to sell stocks says investors are embracing risk, I think he’s misstating the case.  Brokers and traders embrace risk, because win or lose they make money.  But what regular investors embrace are the gains, unless they already have so much money that investing is now just a game, like the billionaires you see on TV.  You and I need to make money; to build our nest eggs for retirement and store up a reserve in case another recession hits.

While Wald may be right that stocks could rally, the situation on the ground remains precarious.  We have effectively no interest, and no immediate prospects, which means our go-to safety assets, bonds, get us nothing.  While Brexit may have slipped momentarily from the headlines, the breadth of ways it will destabilize European (hence American) markets has yet to be made clear; to say nothing of the damage to the British pound and the fate of the euro.  Then of course there’s China’s decelerating economy and the havoc it’s starting to wreak worldwide.

That’s why this bull market for both silver and gold is so encouraging.  Gold, with its historically inverse relationship to both the dollar and the market, provides protection of your buying power when both your stocks and cash lose value.

When the value of the dollar fell between 1998 and 2008, the price of gold almost tripled. And we can see how it’s done this year, as the stock market has been taking a beating from sources worldwide. Gold also resists inflation’s inevitable erosion of your dollar’s buying power; a crucial protection for our futures when healthcare payments, among many other costs, will skyrocket.

With a gold-balanced portfolio in place, silver can then provide you with an attractive speculative opportunity, and unlike stocks it can never lose all its value. If Wald is correct, and silver’s growth anticipates a move up in stocks, you can have the best of both worlds – at least for a while.  The key is to be certain you take any short-term gains and put them where the market can’t kill them when the correction comes. After all, the point of investing isn’t to take a rollercoaster ride; the point is to get out on top.