Over the past few weeks, we have seen silver prices trade more closely in line with the strength in gold prices rather than the weakness in U.S. equities and we think this could be the beginning of an important trend. The firm downtrend in real U.S. bond yields suggests gold will remain elevated and we expect silver to increasingly follow gold rather than equities as inflation expectations gradually rise in spite of U.S. equity declines. We continue to expect the iShares Silver Trust ETF (SLV) to double against the S&P 500 Index (SP500) over the coming 12 months.
Spot Silver Vs. S&P 500
Gold/Equity Ratio Leading The Way Higher
The chart below shows the silver/S&P 500 and the gold/S&P 500 ratios. The latter looks to be gearing up for a run at its March crisis high having posted its third higher low since the 2018 bottom. Fundamentally, the more aggressive fiscal and monetary stimulus measures that policymakers engage in, the greater the prospect for gold to outperform stocks as such measures undermine real GDP growth while increasing inflation pressures and putting downside pressure on real yields, which tends to benefit gold much more than equities.
Silver/S&P 500 & Gold/S&P 500
U.S. 10-year bond yields look like they are about to break lower as COVID-19 second wave concerns rise. Technically, the measured move following the break below uptrend support suggests a run at zero. Such a move would suggest further downside pressure on real yields and upside for gold.
U.S. 10-Year Nominal And Inflation-Linked Bond Yields, %
Huge Potential For The Silver/Equity Ratio
If the gold/S&P 500 ratio continues to head higher as we expect, then it would be very surprising if the silver/S&P 500 did not follow suit. In fact, the upside potential for the silver/S&P 500 ratio is significantly higher in our view, while downside risks are much lower. Not only is silver deeply discounted relative to gold, but it is also more likely to outperform gold in the event of a recovery in the economy and a normalization of interest rates given its higher industrial use.
U.S. 10-Year Inflation Expectations, S&P 500, Silver
Since the March crash, both U.S. stocks and silver, as well as many other assets, have moved in lockstep in line with market-implied inflation expectations. Over the past few weeks, however, the S&P 500 has drifted lower while silver and inflation expectations have continued to head higher which may signal that an important trend change is afoot. The combination of the weak macroeconomic outlook, extreme valuations, and deteriorating market breadth (see ‘U.S. Equity Crash Risks Rising‘) suggests there is considerably more downside for stocks. As equity prices head lower, expectations of further monetary and fiscal stimulus measures are likely to rise, preventing a decline in inflation expectations and silver. As explained here, equity bear markets have tended to be…