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Don’t forget about volatile silver: it is a decent alternative to gold

AS ONE might have expected, renewed risk aversion and fears about sovereign debt have sent the price of gold sky high. The precious metal hit a record high last week of $1,242.70 as investors scrambled for perceived safe havens.

But with all the attention lavished on gold, the recent strength of silver has gone remarkably unnoticed by the media. Understandably, you might think, since silver’s recent two-year high of $19.64 is barely comparable to gold’s all-time record.

In fact, silver has actually outperformed gold in recent months – its price has risen some 30 per cent since early February compared with just 17 per cent for gold. But can spread betters count on this continued outperformance?

One indicator that suggests silver still has some catching up to do is the gold-silver price ratio. The 10-year average sits at 61.6 but the ratio is currently 63.3, indicating silver has not managed to keep up with the recent rally in gold. (See chart, right.)

There is usually a positive correlation between the two precious metals, suggesting that silver and gold prices both rise together. Research has also shown that gold has a stronger correlation with silver than it does with either platinum or palladium, the other two precious metals. It is no surprise then that silver has been doing well as it provides an affordable alternative to gold for those wanting to take a punt on the risk aversion scenario.

However, those expecting sustained rises might be disappointed. Silver has not broken beyond the 26-month highs reached on Thursday and indeed it has come off slightly since then to $19.44 on Friday.

Investors are not backing further upside either – silver exchange-traded product (ETP) holdings recently suffered their largest monthly net redemptions on record of 335 tonnes, according to Barclays Capital.

HYBRID METAL
Although you might expect that silver’s status as a hybrid metal – it has both precious and industrial uses – will keep the price supported as the global economy recovers and the fiscal crisis recedes, analysts at French bank Natixis don’t agree.

“Given our view that gold prices are likely to retreat over coming months as the global economy gradually recovers and Europe’s fiscal crisis recedes, silver prices would inevitably suffer as a result,” they write in their second quarter metals review.

They add: “While they will benefit from a continuing recovery in industrial demand, we would nevertheless expect them to decline alongside weaker gold prices, and this could mean average prices by late 2010 near $16.”

Spread betters will also be keen on silver’s volatility. “On average, and across the last 42 years, a 1 per cent move in gold is matched by a 1.75 per cent move in silver, both up and down,” says Adrian Ash at BullionVault.com.

So whether silver rises or falls from here, the chances are that the moves will be sufficient for leveraged day traders to scalp a few points of profit. All the major spread betting providers offer silver futures; GFT has a spread of three basis points with a margin requirement of only 1 per cent. It can also be traded almost 24 hours a day.

Gold might be hitting the headlines on a daily basis at the moment, but spread betters should remember that there are profitable alternatives to the precious metal.