Performance of Gold vs. Silver

Precious metals are all the rage these days as many people are looking for a hedge against inflation and diversification. The following chart tracks gold and silver prices since 2000:

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Investors are also buying silver as a play on robust industrial demand. Silver is used in electrical appliances (silver has the lowest resistivity of industrial metals), photovoltaics (one of the highest reflectors of light), RoHS compliant solder, clothing and medical uses (silver has antibacterial properties), RFID tags, wood preservatives, water purification, and food hygiene.

The Silver Institute has seen a noticeable increase in silver-based biocide products coming onto the market, as they explain:

Currently we’re seeing a surge of applications for silver-based biocides in all areas: industrial, commercial and consumer. New products are being introduced almost daily. Established companies are incorporating silver based products in current lines – clothing, refrigerators, mobile phones, computers, washing machines, vacuum cleaners, keyboards, countertops, furniture handles and more. The newest trend is the use of nano-silver particles to deliver silver ions.

Silver use is surging in electronic and thermal equipments. Stronger industrial demand from the US and Asian countries like India and China should continue to keep demand up for silver.

The gold/silver multiple represents the value of an ounce of gold denominated in ounces of silver. It is calculated by simply dividing the per ounce price of gold by that of silver. Silver’s buying power of gold has averaged around 60:1 for the last three decades. This means that it would take sixty ounces of silver to purchase one ounce of gold. Today, the gold/silver ratio is more like 42:1, with silver sitting around $35 per ounce. The following chart shows the gold/silver ratio since 2000, with a 200-day moving average:

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Silver reached an all-time nominal high around $49 per ounce in early May before stumbling back to the mid-thirties after margin requirements were raised multiple times by COMEX (Commodity Exchange, Inc.). All this means is that traders needed to have more cash deposited for trading silver futures. The actions of COMEX, combined with a short term overbought market, is why the metal crashed 26% in one week. Perhaps investors also realized the gold/silver multiple was getting a bit low in early May compared to historical standards. However, with robust industrial demand, bullion coin demand, global inflation, a weak US dollar, and ETF fund flows capitalizing on these trends, it’s reasonable to expect the white metal to remain white hot.

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1 Comment

  • The two precious metals are tied largely in the minds of hard money patriots. Otherwise, they are no more related than coffee and orange juice: a matter of cultural accident. They are not substitutes for each other.

    Still that perception is a reality, as noted in the famous Thomas Theorem from sociology: “If men define situations as real, they are real in their consequences.” While futures markets in general are fields for speculation, silver and gold serve large consumer markets. Far more gold is put into jewelry than into coins. For silver, coinage overtook silverware in 2008 and photography in 2009. Industrial applications are still more than ten to fifteen times that of coinage and medals. (http://www.silverinstitute.org/supply_demand.php).

    As for the hedge against inflation, historically, silver has been “the poor man’s gold.” The U.S. Treasury ran out of its Buffalos and 5-ounce “hockey pucks” because people who cannot afford other investments feel that thay cannot afford -not- to buy silver. The fact is that Americans prefer American products – Silver Eagles, Gold Eagles, Morgan Dollars, etc. – and like the run-up in gold, the price of silver reflects deep understanding about the financial record of the United States government.

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