I say this because the ratio of the gold price to silver is now at its highest since September 2010. Leigh Skene at Lombard Street Research points out that this ratio is an indicator of investors' attitudes to risk. When they are nervous, they dump silver and so a high gold-silver ratio is a sign of high risk aversion.
It's no accident that the two peaks in the ratio since 2000 came when investors were feeling miserable - at the bottom of the bear market caused by the bursting of the tech bubble in 2003; and at the worst point of the financial crisis in 2008-09.
What's more, the gold-silver ratio is correlated with the so-called 'fear gauge', the VIX index; in weekly data since December 1999, the correlation coefficient has been 0.44. It's also correlated with the dividend yield on the All-Share index, with a coefficient of 0.39 since 1999.
All this prompts the thought. High risk aversion should mean high expected returns, so if the gold-silver ratio measures risk aversion, shouldn't it predict equity returns?
Yes, it does. Since December 1999, there's been a statistically significant correlation (0.26) between the gold-silver ratio and All-Share returns in the following 12 months. The high ratios in 2003 and early 2009 led to big rises in shares, and the low ratio in 2011 led to a fall.
Intriguingly, this predictive power doesn't come simply because the ratio is correlated with the dividend yield. Even controlling for the yield, there's still a significant link between the gold-silver ratio and subsequent equity returns.
With this ratio now near a three-year high, this is moderately good news for shares. If post-1999 relationships between the ratio, the dividend yield and subsequent moves in the All-Share continue to hold, there's a better than 50:50 chance of the market rising over the next six months; the point-forecast from the regression equation is for a 1.7 per cent rise.
Of course, this should come with a health warning. Thanks in part to the very volatility of the silver price, the gold-silver ratio is an imperfect indicator; even with the dividend yield it can explain only one-seventh of the variation in subsequent six-month returns on the All-Share index. Personally, I suspect there are stronger, more bearish indicators - such as the fact that it's May.
Nevertheless, if you want a reason to be bullish, the gold-silver ratio is one. And if silver falls further, this reason will get stronger.
