The Market So Small It's Explosive

Chart of the Week #62

Last week, I wrote to you that "silver is starting to close the gap with gold. This could be classic silver action: lag early, surge late, and ultimately blow gold out of the water."

I realized today that this kind of behavior may be puzzling to some—so this week's Chart of the Week is about exactly that phenomenon.

Now, there are several reasons why silver tends to start slower but ends up outperforming gold historically... and why I think it'll happen again this time around.

First, like gold, silver is a precious metal. The word literally means "money" in dozens of languages, and that's no coincidence. But unlike gold, about 80% of silver is actually mined as a byproduct of industrial metal mining—or even gold mining itself. So silver supply doesn't react as directly—or as quickly—to higher prices like gold usually does.

Then there's the size of the silver market (which brings us to today's chart).

As you can see, the silver market is only about one-eighth the size of the global gold market. It's actually smaller than even the zinc and nickel markets—industrial metals most people don't think about at all.

With a market this tiny, it only takes a relatively small amount of money to move prices around significantly. And when large amounts of money flow in? The price impact can be dramatic.

Here's how it usually plays out…

Early in precious metals bull markets, most of the money flows into gold first—it's the household name, the "safe" play that everyone knows. But as the bull market matures and investors start looking for more leverage, they discover silver. And when that discovery happens, the small market size means prices can move violently higher in a very short time.

Let me show you another chart that demonstrates this perfectly—silver and gold performance during the 1976-1980 period.

During those years, we had high inflation, geopolitical tensions, and economic uncertainty—much like today. So investors flocked to gold and silver as safe-haven assets. Again, much like they are doing today.

The results were spectacular. Gold gained an impressive 415%... but silver returned more than double that at 860%. And it all followed the same pattern: starting off behind gold, silver gradually caught up and surged ahead as the bull market reached its peak.

Now, if you're looking to invest in silver, it's crucial to know that not all bets on the silver price are created equal.

Doug Casey always recommends holding precious metals in your long-term investment portfolio. But he also recommends investing in precious metal stocks for more leverage.

That's because miners tend to outperform the physical commodities when prices rise, as their fixed extraction costs get spread across much higher revenues. This operational leverage can amplify returns significantly.

That's exactly why we think now is a great time to be in silver stocks. Because despite silver having a great year, silver miners are still trading at incredibly cheap valuations—something I dive into in detail in the latest issue of Crisis Investing (the lead story is free for all subscribers). And that's precisely why we've just added a compelling silver pick to our Crisis Investing portfolio.

Regards,

Lau Vegys