Streets Paved with Gold... or Silver?
Geopolitical concerns and inflation throughout the first few months of 2011 have resulted in a dramatic rise in the price of precious metals, with gold and silver reaching fresh highs this week. But can silver overshadow its rarer counterpart?
In Monday morning trading this week, gold prices hit an unprecedented $1518 per ounce, while the cost of silver also jumped to $49.82 an ounce – just shy of its all-time high of $50.35.
Although gold is grabbing all the headlines at the moment, with some analysts predicting a rise to $1600 by year-end, in absolute terms it appears that silver is outshining its more expensive cousin. Since the beginning of the year silver has risen in excess of 22%, compared to an increase of just over 12% for gold.
The gold/silver ratio, which is an expression of the quantity of silver needed to purchase one ounce of gold, is now positioned at around 1:33 – its lowest level since October 1983. Last year the ratio peaked at 1:65. But why this relative rise to prominence for silver, and can it maintain the rally?
Will profit taking bring precious metals lower?
A seemingly never-ending stream of negative headlines and natural disasters has battered investor confidence so far this year. With so much uncertainty stemming from the eurozone sovereign debt catastrophes, as well as oil supply concerns and the crisis in Japan, traders have been flocking to safe haven assets such as silver and gold.
The question for investors now, is: if these geopolitical concerns were to ease, would precious metals experience a corresponding drop in price? With silver and gold prices close to, or exceeding, their historic highs, profit taking is certainly a possibility. Silver’s volatile nature when compared to gold could result in a significant correction lower, which would see silver underperform gold going forward.
Silver lining
However, as global inflation spirals higher in the US, Europe and China, precious metals are becoming increasingly attractive as a hedge. With the US and UK central banks seemingly unwilling to risk stunting domestic growth through tighter monetary policy, inflation could well continue to rise. This is likely to push gold and silver up in the short/medium term.
Silver has the added benefit of being used extensively in industrial production, in particular as a replacement for lithium in batteries for smartphones and other mobile devices. As these items become ever more popular, the corresponding demand for silver is likely to grow. Rising affluence among a growing middle class in emerging markets is also driving demand for jewellery. With gold becoming almost prohibitively expensive, silver may benefit as the relatively cheaper alternative.
There is an estimated 700-800 million ounces of silver in circulation, and so the metal could be considered very tightly held. There is the potential therefore for supply to be outstripped by demand, which would likely add upward pressure to silver prices as a result.
Learn more
Want to know more about gold and silver? Prepared by our in-house research team, the Commodities Update presents a weekly round-up of the UK’s major commodity news. This week, gold is in focus.
Take a position
Is silver set to maintain its impressive rally? Or will the metal stall and begin to underperform compared to gold? IG Markets offers CFDs on a wide variety of metals, including spot and forward contracts on both silver and gold. We also offer CFDs on a range of stock indices, major and minor forex pairs, and over 7000 individual shares. If you're not yet an account holder, you can apply online now, with no forms to fill in and no obligation to fund.
Updated: 26/04/2011
The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.
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