SENIOR ANALYST, ETF SECURITIES
GOLD has continued to post new all-time highs this week as gold prices have closed in on $1,300 an ounce, but what of its close cousin, silver? While the gold price continues to rise, the silver price remains at less than half of its historic high of the early 1980s. But it has outperformed gold over the past 18 months. Spot silver prices have outperformed spot gold by 37 percentage points since between 31 December 2008 and 20 September 2010.
Like gold, silver prices have performed strongly in all major currencies, rising over 22 per cent in dollar terms between 31 December 2009 and 20 September 2010.
In terms of investment performance, historically the silver price has acted as a geared play on gold prices. Silver returns tend to be more volatile than gold returns, with its volatility more akin to an industrial metal than to gold.
Silver also tends to be more sensitive to the business cycle due to its heavy use in industry, whereas gold tends be viewed as the prime safe haven commodity. This tendency is related to the fact that half of silver is used in industrial applications each year compared to less than 20 per cent for gold. When the gold price is rising, often the silver price outperforms. However, when the gold price falls, silver can fall sharply. As shown in the chart to the right, the ETFS Physical Silver (PHAG) has seen returns close to the ETFS Leveraged Gold (LBUL) recently, and has outperformed ETFS Physical Gold (PHAU).
The gold-to-silver price ratio – a barometer that is closely watched by investors – remains above historic average price levels. Gold and silver have tended to follow each other over time. Despite substantial outperformance of silver relative to gold in 2009, the silver price continues to trade at a discount compared to gold in relation to its long-run (50 year) average.
The gold-to-silver ratio hit multi-year highs in late 2008 as gold initially outperformed silver in the immediate aftermath of the credit crisis. However, the ratio has since been edging down as silver has outperformed gold since the start of 2009.
Silver could prove a viable and cheaper alternative to the glittering lure of gold.