*NOTE: This post contains interactive charts which are best viewed on a large screen.

This post was originally an ipython notebook I created to explore the relative movement of ASX stocks (using ASX 200 index) vs Gold and silver over the last 30 years. Data was collated from:

  • Exchange rate: rba.gov.au
  • ASX, Gold and Silver price: marketindex.com.au
  • Recent Gold and Silver price: LBMA.org.uk

The ASX 200 price to Gold and Silver ratio

Precious metals are seen as safe havens when there’s uncertainty in the economy. There are a lot of interests in understanding the behaviours of precious metals’ market values relative to cash and other asset classes.
In the graph below, we can see the relative price between ASX stocks and Gold/Silver.
Gold’s relative value to stocks peaked in 2009 during the GFC. At the point of writing (April 2020), the Gold to stocks ratio already exceeded that during the GFC. This suggests that there is limited room for Gold to gain values relative to stocks.
Silver on the other hand still has not reached its peak in 2011. This might suggest a buying opportunity.


Cumulative return of the three asset classes from 1992

Before using an asset class to hedge against the dollars, one would want to know its historical cumulative return. Over the last ~30 years, gold saw a 450% return, compared to 350% for Silver and 300% for Australian stocks (prior to the Corona’s downturn).
This does not take into account dividends from stocks and holding costs for Gold and Silver, which will bring them more in line with one another.


Cumulative return of the three asset classes from 2000

Focusing on the last 20 years, silver significantly outperforms Australian stocks and Gold in terms of growth as seen below. This is actually very interesing. To see if we can find more evidence to support using Silver as a wealth reservation instrument during a tumultuous economy, we take a deeper look at each asset class.


ASX price movement

A widely used indicator to study a stock’s price movement is the Bollinger bands, where we show the running average plus/minus 2 standard deviations. The actual stock price is also shown. The running averege represents the long-term trend, whereas the actual price has inherent fluctuations and noises that usually can be ignored. It is theorised that a stock price will tend to go back to the running average after it exceeds the upper or the lower band (deviates more than 2 standard deviations).
As shown below, ASX stock price has already dropped below the lower band due to the recent Corona bear market. This can drop even further if the global economy continues to tank.


Gold price movement

When the stock price drops, gold picks up, and it already exceeds the upper Bollinger band as seen below. Throughout its lifecycle, Gold always raises above the moving average whenever investors’ confidence in the economy is low.


Silver price movement

Silver price, on the other hand, is still very close to the moving average. One important point to note, during the GFC, we saw that the peak of Silver’s relative value to stocks lagged the Gold’s peak by 6 months.
This might be attributed to the fact that many investors and non-investors see Gold as a safe backup plan to reserve their wealth, which increases the demand for Gold during a crisis. At some point, Gold’s price will start to be deemed overvalued, that is when Silver is seen as the next logical place to bank their assets. At this point in time, it appears that Silver has not caught up to the growth in precious metal’s price due to the recent Corona downturn, and is likely to do so in the near future.


Endnotes

We have only looked at the asset classes from a technical perspective and is therefore not a complete picture. But the trend indicates that the best time to buy into Gold for a quick return might have already past, and one of the next options is Silver.

It would be interesting to conduct the same analysis for properties as well, which I might explore in another post.