The gold bugs may make the most noise, but over the past couple of months silver has actually outperformed the metal everyone loves to talk about.

Since the end of September, the price of silver has shot up 35%, while gold has only appreciated by 7%.

However, this has also pushed up the silver-to-gold price ratio to an unsustainable level, suggesting there is little upside remaining for silver.

“The silver-to-gold ratio has increased almost vertically. Silver was trading at approximately 1.6% of gold back on Sept. 23, while it now trades at 2%. This is almost two standard deviations above the long-term average of 1.5%,” Pierre Lapointe, strategist with Brockhouse Cooper, said in a note Thursday. “This suggests to us that there is little upside left in the silver-to-gold ratio.”

This ratio has a close relationship with equity performance, but has far outpaced any increase with the S&P 500 recently, which again suggests the ratio is overextended, he said.

Mr. Lapointe also expects gold to drop to US$1,000 an ounce next year. If this occurs and silver maintains its US$28/oz level, this would create a ratio of 2.8%, unheard of in the past 20 years.

“Our expectation of a decline in gold prices implies that silver would likely fall as well in 2011,” he said.

Eric Lam