Silver Set to Fall off Gold's Bandwagon

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". . .the discount was at its widest, with a gold-silver ratio of 85, last November. Since then, silver has gained 38% compared with 16% for gold."

The bulls are in the silver shop, with headlines shouting about silver's widest discount to gold for 13 years—quoting the ratio between dollar prices per ounce for the "poor man's gold" and the genuine article as 72, compared with an average of 58 over the past two years. The theory is that simple mean reversion could spell some 'catch-up' for silver versus gold; but we doubt it.

So far this year, silver has risen 18% compared with a 5% rise for gold—and there are plenty of cheerleaders. CNBC pundit Jim Cramer has said: "Silver has more room for growth than gold. There's a lot of steam left in the precious metals market, so that scenario shouldn't change anytime soon."

Shouldn't it? In the past 13 years, the discount was at its widest, with a gold-silver ratio of 85, last November. Since then, silver has gained 38% compared with 16% for gold, so a good portion of any mean-reversion has already taken place. Furthermore, the 20-year, rather than two-year, average gold-silver ratio is actually 68.

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