GOLD has once again proved its mettle as a hedge against financial chaos.
If history is any guide, the gains may have room to run further.
But they could also soon be outshined by that other, less-adored precious metal.
The yellow metal is a contentious subject in the investment community, with passionate advocates and detractors alike.
But a levelheaded look at the historical record suggests a clear conclusion: While it underperforms stocks vastly in the very long run, gold is also prone to extended periods of outperformance when things go awry.
Silver rallies also tend to follow gold after a lag.
Gold did better than the S&P 500 in the 1970s and the first decade of this century.
It protected investors from inflation in the first case and from a more general malaise from dot-com bust to financial crisis in the second.
It could be set to repeat the feat again.
So far this decade, gold has returned 113 per cent compared with 78 per cent for the S&P 500 including dividends, according to my data.
Still, investors thinking about loading up on gold now could be forgiven for feeling a bit queasy.
Gold reached a record high in dollar terms this week before pulling back after President Donald Trump softened his tone on both trade and the Federal Reserve.
Nonetheless, it is up around 41 per cent over the past 12 months.
Luckily, history suggests silver could row in behind it.
Silver has risen around 23 per cent over the past year, underperforming gold though still handily beating the S&P 500’s 6 per cent return over that period.
This likely has to do with silver’s split personality.
As a precious metal, it carries much of the haven appeal of gold, promising to retain value amid inflation, war, societal strife and the like.
But it also has more industrial uses than gold, such as in electronics and solar panels, making it more economically sensitive.
(For a related discussion, you may recall my analysis last year highlighting gold’s role as a critical material in Nvidia’s product lineup.)
So when markets start fearing a downturn, gold often outshines silver, at least initially.
Hard-asset aficionados like to keep an eye on the ratio of gold to silver prices, to gauge when the yellow metal is getting overheated.
As of Wednesday (April 23), gold cost 98 times as much as silver per ounce, down from over 100 earlier this week.
The average over the last 30 years has been 68.
The only other time in that period when the balance was so out of whack was amid the initial COVID panic in March 2020, when it reached 113.
In the 12 months following that episode, silver prices rose 73 per cent while gold rose just 8 per cent.
During the financial crisis, the gold-silver ratio never breached 100.
It did rise sharply from 53 in June 2008 to 80 in November.
This, too, heralded a strong run for silver.
It rose 81 per cent over the subsequent 12 months versus a 44 per cent gain for gold.
During a less-remembered market panic in early 2016, the ratio also topped 80.
Once again, this led to subsequent outperformance for silver.
What could break the pattern this time?
A truly ruinous global trade situation might do the trick, thanks to silver’s economically sensitive side.
But even the recession triggered by the global financial crisis was over by June 2009, allowing silver holders to benefit from both the Federal Reserve’s monetary easing and a cyclical upturn in industrial demand.
To hedge against a worst-case scenario, gold still outshines silver.
For anything less, history suggests it may be time for investors to introduce a new precious-metal friend to their portfolio, even while keeping the old.
The views expressed here are those of the columnist and do not necessarily represent the views of Sarawak Tribune. The writer can be reached at med.akilis@gmail.com
