Gold and silver usually have a pretty close relationship. Gold typically leads silver in price movements – up or down – while silver generally makes the larger move either way. With gold up so quickly recently, silver has lagged behind a little but could be set for a big move.
Historically, the two metals have shared a tight correlation. Over the past 10 years the daily movement in the price of gold has been mirrored by silver for an additional 45%. Every 1% move in gold means silver averages 1.45%. Considering that gold is up more than 18% year to date, silver should be up 26%. But it’s only up 13% so far. Since silver lags slightly behind gold, it’s a good bet that silver is due for a big rally.
Gold Isn't All That Glitters
Gold’s movement in the market is tied to much more than its economic use. Gold prices are determined by factors such as inflation, interest rates, and general economic sentiment. Silver on the other hand, is valued for its industrial applications. China’s slowing economy, along with other macroeconomic concerns, have kept industrial metals from rising over the past year, but that could all be changing.
China reported greater than expected GDP growth while metals like copper and steel have been on an upwards swing. It should help boost silver’s value as an industrial metal going forward, while its value as a safe-haven continues to be true with gold’s strength. It’s a two-pronged bonus from which silver should benefit.
Because silver hasn’t seen as much of an increase this year, many investors are considering it as both a growth play and a defensive hedge. Silver is only now starting to see any investment action as well, meaning that there’s plenty of upside movement from purchases. The SPDR Gold Shares ETF (GLD) has brought in $5.8 billion in new assets, while the iShares Silver Trust (SLV) has only raked in $123 million.
The battle going on in the energy markets has helped both gold and silver, while the U.S. dollar is slowly stepping down from its long-standing reign as the strongest asset class for investors. A possible bottom in the commodities market could also be a catalyst for silver moving forward. Industrial metals have seen rising demand, suggesting that a real rally could be taking a foothold in the global economy.
The Bottom Line
If gold has peaked, which some investors say is a possibility, especially if inflation falls again, it won’t necessarily spell doom for silver. If gold falls, it won’t be due to increased economic activity. In fact, a drop could actually translate to more gains for silver as investors take faith in the global economy again instead of ducking into safe-haven assets. But even if deflation occurs and gold continues to rise, silver will likely follow suit as a value play for defensive investors. Either way, silver looks to be in a win-win scenario.
