“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Saturday, January 21, 2012

Long term View of the Gold/Silver ratio

You will note on this chart that since Silver peaked near $50 back in April of last year, gold had generally been outperforming it for the remainder of the year. I am of the opinion that this was due to the anticipation of the end of QE2 in June of last year. Traders began preparing for the loss of the liquidity being supplied from that front. When you couple this with the fact that European sovereign debt woes began to gain ascendancy in the minds of traders worldwide, it is easy to see why gold held up better than silver. DEFLATION was back in; INFLATION was out.



If, and this is a big "IF", traders become convinced that deflationary forces have been left behind, then the environment in which the grey metal will outperform the yellow metal is created. In such a case, this ratio will begin trending LOWER as silver outperforms.

Every single bit of this is dependent on the attitude of traders towards risk, which is simply another way of saying whether they are leaning more towards improving global growth prospects and inflation rather than slowing global growth and deflation.

Stay tuned as the environment is still very volatile. For this week at least, the inflationary (risk trade) forces have won the battle.

1 comment:

  1. Hi Dan! All central banks are now providing backdoor liquidity to banks and by extension governments. But what happens when one of the over-indebted countries, such as Greece, leaves the Eurozone? I suppose liquidity would dry up anyway and that would be short-term deflationary. What do you think?

    ReplyDelete