Positive sentiment throughout the globe is beginning to accelerate, led by record equity prices. Global growth is emanating from the United States, as investors expect a boost from the Tax laws voted on by the Congress. When confidence starts to reach elevated levels, the savvy investor will add precious metals to their portfolio by purchase gold bullion and silver eagle coins.
One of the best ways to diversify your portfolio is to allocate some of your funds into alternative assets that do not move in tandem with stocks and bonds. When you buy silver and gold, you are reducing the likelihood of giving back a portion of your gains when riskier assets start to correct. During periods of better than average growth, you can buy silver eagles as the price of silver is likely to outperform gold.
Stronger Growth Helps Silver Outperform Gold
The investing landscape over the next couple of years is likely to be upbeat as corporate tax cuts drive growth. The reduction of the corporate rate from 35% to 21%, is geared to incentivize foreign companies to set up shop in the U.S. and entice U.S. firms, that have operations overseas, to bring them back home. When you combined tax incentives with deregulation, the United States is poised to produce better than 3% GDP, which will probably spill over into Europe and Asia. European and Asian central banks remain in an accommodative monetary policy stance, which should further buoy the global economic rebound.
During periods where growth is robust, the price of silver generally outperforms the price of gold. The chart of gold prices divided by silver prices shows the historical ratio that declines when silver is outperforming gold. When the United States experienced robust economic growth and strong equity market returns in the mid-90s, the ratio decline as silver outperformed gold. The ratio then began to move higher, as gold outperformed silver, following the Nasdaq market crash in 2000 which was the catalyst for a 3-year recession.
There are Some Exceptions
There are occasions when gold will outperform silver even during economic expansion. This happens when geopolitical risk or terrorism emerges. During periods when fear engulfs market participants, such as 9/11, or the Iraq war, traders immediately look for safe-haven assets, and gold coins and gold bars are usually at the top of their lists.
The ratio of gold to silver is now at a lofty 78.26 times the price of silver. This elevated level is near the upper end of the 50-year range of the ratio. The distribution of the ratio shows that the spread of gold divided by silver is currently 2-standard deviations above the 20-month moving average, which has historically been solid resistance. The 200-month moving average of the ratio, which is equivalent to approximately 17-years, is 20% lower than current levels. During the past 20-years, the ratio has crossed above or below the 200-month moving average 6-times, which would allow 1-ounce silver rounds to outperform gold coins by 20% if economic expansion accelerates.