What Is the Gold-to-Silver Ratio Saying About Emerging Markets?

Ratio analysis is one way to measure how extended one asset is to another. You can do this by dividing the price of one asset by another asset and plotting it out over time.

A ratio that stands out right now is the gold-to-silver ratio, which measures the number of silver ounces needed to buy a single ounce of gold. The spread was above 80 recently, which was the highest since late 2008 and the financial crisis.

Silver is considered to be both a precious metal and an industrial metal. So if industrial metals begin to improve (as they have in the past two months), silver should do well. Here’s where things get interesting. Emerging markets (EM) are correlated with industrial metals, as places like Brazil and Russia are also big commodity exporters.

The chart below shows that the previous two times the gold-to-silver ratio was up near 80, the MSCI Emerging Markets Index was near a low. Time will tell if this plays out again, but it is worth watching for allocating to EM.
04-15-16 blog fig1_1

Higher commodity and industrial metal prices would be beneficial to EM; however, is it time to warrant a significant allocation? In this week’s Weekly Market Commentary by Burt White and Matthew Peterson, they concluded:

By itself, increased investor confidence in EM companies is not sufficient to warrant a significant allocation to EM, though aggressive and more tactically oriented investors may decide that is enough to initiate a small position, when suitable. Stability and eventual improvement in corporate earnings are a necessary part of any sustained rally in EM performance. Increased economic stability and clarity on policy, especially in key countries like China, will also serve as confirmation of an “all clear” for the asset class. However, by the time such clarity is received, valuations will likely be higher than they are today. The famous global investor Sir John Templeton suggested that one should buy EM when “there is blood in the streets.” Times have changed and these markets no longer experience the kind of turbulence they did in Templeton’s day. Perhaps this should be changed to buy when there is still “red on the screen.”

You can read the entire Weekly Market Commentary, “Emerging Market Earnings: Is the Tide Turning?” here.

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.

The MSCI Emerging Markets Index captures large and mid cap representation across 23 emerging markets (EM) countries. With 822 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

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