Silver prices could outperform gold in the months ahead should the yellow metal keep attracting safe-haven flows, prompting some investors to turn to silver as a less-expensive alternative.
However, analysts said, gold is likely to fare better than another benchmark commodity, crude oil, as the precious metal keeps attracting investor interest while oil is limited as a soft economy curtails industrial demand.
Some traders try to profit by making the right bets on the gold/silver and gold/oil ratios, in which they try to capitalize on the difference in the move of one commodity versus the other. Somebody betting on the spread favoring silver would buy this metal but sell gold, ideally in equal dollar amounts. They would profit even if both fell, provided that gold falls by a larger percentage. Others simply look at a ratio as an objective measurement of which commodity is performing better.
The gold/silver ratio is determined by dividing the price of an ounce of gold by the price of an ounce of silver. Based on Tuesday s pit settlements for December U.S. futures contracts, this stood at 64.34, meaning it took 64.34 ounces of silver to buy one ounce of gold. Based on average monthly prices, the gold/silver ratio averaged 61 over the last decade and 56 since 1971.
Gold hit record highs in June while silver remained below its peak from two years ago. Silver has been thwarted since much of its demand is industrial, which was hurt by the economic slowdown. Yet, silver has a double role as a precious metal and also benefits from investment demand.
Some choose silver for a safe haven because it is far more affordable. As gold becomes costlier, silver buying may increase, some said.
Silver is poor man s gold, said Gijsbert Groenewegen, managing partner of Silver Arrow Capital Management, who looks for the ratio to eventually fall below 52. When people don t want paper money, they will go for gold and silver. And the man in the street will go for silver because that s something he can buy.
Mike Daly, gold and silver specialist with PFGBest, called silver the blue collar-safe haven since gold is around $1,250 an ounce but silver is in the neighborhood of $19 an ounce.
Right now, gold still has a lot of upside, Daly said. But, he later added, silver has the legs to actually outperform gold because of its dual status of being a precious metal as well as an industrial metal.
Groenewegen said he fears the broader markets may soon weaken further. This could initially drag down precious metals as hedge funds sell to exit positions and raise money to meet redemptions due in other markets. But gold and silver eventually will return to favor, he predicted.
The timing of any return in the ratio below 52 will be dictated by outside markets and economic forces, he said. But I think it will happen in the next two years, Groenewegen said.
Meanwhile, when both metals travel in the same direction, silver often makes larger percentage-point moves because it is a more thinly traded metal than gold. This means greater potential for a smaller number of orders to suddenly rile the market.
When you get a run of fund activity and technical buying, it tends to outperform, said Bill O Neill, one of the principals with LOGIC Advisors. So over the long term, although the real fundamental reasons for silver going up are more related to gold silver can outperform and probably will outperform gold to some degree.
David Morgan, analyst with Silver-Investor.com, said he looks for gold and silver to do well for the rest of this year and next, but with silver to have the upper hand and eventually drive the gold/silver ratio below 50. He cited silver-investment demand coupled with potential for increasing industrial-type uses for the versatile metal. As such the market is likely to return to an annual supply/demand deficit by 2012, he said.
At some future point, Morgan looks for silver to suddenly narrow the ratio with gold dramatically--maybe even as low as 16--near the time when the bull market for the metals might be ending, just as happened back in 1980 when silver briefly shot up to the $50 region as gold got around $850.
Say the ratio gets back to 45 to 1. In the last blow-off phase (of a bull) market, you could see it drop from 45 to 1 down to 16 to 1 in a couple of months, Morgan said.
He described the 1980 bull market as a horse race in which silver lagged, then put on a charge near the finish line. The Hunt Brothers massive purchases played a role in silver s surge back then, but now there are far less silver stockpiles around the world, thereby supporting silver, Morgan said.
Still, some worry that silver s dual role as an industrial metal will hold it back for a while yet in a soft economy, resulting in either a stable gold/silver ratio or even enabling gold to outperform.
Going forward, I think a person can be mildly bullish on silver, said Sterling Smith, commodity trading adviser and analyst with Country Hedging. But I still look for it to underperform gold. The industrial component is probably going to remain weak, as will the economy probably through the first half of 2011.
Whenever the economy finally recovers, however, silver may gain ground on gold as industrial demand restarts, Smith added.
However, analysts said, gold is likely to fare better than another benchmark commodity, crude oil, as the precious metal keeps attracting investor interest while oil is limited as a soft economy curtails industrial demand.
Some traders try to profit by making the right bets on the gold/silver and gold/oil ratios, in which they try to capitalize on the difference in the move of one commodity versus the other. Somebody betting on the spread favoring silver would buy this metal but sell gold, ideally in equal dollar amounts. They would profit even if both fell, provided that gold falls by a larger percentage. Others simply look at a ratio as an objective measurement of which commodity is performing better.
The gold/silver ratio is determined by dividing the price of an ounce of gold by the price of an ounce of silver. Based on Tuesday s pit settlements for December U.S. futures contracts, this stood at 64.34, meaning it took 64.34 ounces of silver to buy one ounce of gold. Based on average monthly prices, the gold/silver ratio averaged 61 over the last decade and 56 since 1971.
Gold hit record highs in June while silver remained below its peak from two years ago. Silver has been thwarted since much of its demand is industrial, which was hurt by the economic slowdown. Yet, silver has a double role as a precious metal and also benefits from investment demand.
Some choose silver for a safe haven because it is far more affordable. As gold becomes costlier, silver buying may increase, some said.
Silver is poor man s gold, said Gijsbert Groenewegen, managing partner of Silver Arrow Capital Management, who looks for the ratio to eventually fall below 52. When people don t want paper money, they will go for gold and silver. And the man in the street will go for silver because that s something he can buy.
Mike Daly, gold and silver specialist with PFGBest, called silver the blue collar-safe haven since gold is around $1,250 an ounce but silver is in the neighborhood of $19 an ounce.
Right now, gold still has a lot of upside, Daly said. But, he later added, silver has the legs to actually outperform gold because of its dual status of being a precious metal as well as an industrial metal.
Groenewegen said he fears the broader markets may soon weaken further. This could initially drag down precious metals as hedge funds sell to exit positions and raise money to meet redemptions due in other markets. But gold and silver eventually will return to favor, he predicted.
The timing of any return in the ratio below 52 will be dictated by outside markets and economic forces, he said. But I think it will happen in the next two years, Groenewegen said.
Meanwhile, when both metals travel in the same direction, silver often makes larger percentage-point moves because it is a more thinly traded metal than gold. This means greater potential for a smaller number of orders to suddenly rile the market.
When you get a run of fund activity and technical buying, it tends to outperform, said Bill O Neill, one of the principals with LOGIC Advisors. So over the long term, although the real fundamental reasons for silver going up are more related to gold silver can outperform and probably will outperform gold to some degree.
David Morgan, analyst with Silver-Investor.com, said he looks for gold and silver to do well for the rest of this year and next, but with silver to have the upper hand and eventually drive the gold/silver ratio below 50. He cited silver-investment demand coupled with potential for increasing industrial-type uses for the versatile metal. As such the market is likely to return to an annual supply/demand deficit by 2012, he said.
At some future point, Morgan looks for silver to suddenly narrow the ratio with gold dramatically--maybe even as low as 16--near the time when the bull market for the metals might be ending, just as happened back in 1980 when silver briefly shot up to the $50 region as gold got around $850.
Say the ratio gets back to 45 to 1. In the last blow-off phase (of a bull) market, you could see it drop from 45 to 1 down to 16 to 1 in a couple of months, Morgan said.
He described the 1980 bull market as a horse race in which silver lagged, then put on a charge near the finish line. The Hunt Brothers massive purchases played a role in silver s surge back then, but now there are far less silver stockpiles around the world, thereby supporting silver, Morgan said.
Still, some worry that silver s dual role as an industrial metal will hold it back for a while yet in a soft economy, resulting in either a stable gold/silver ratio or even enabling gold to outperform.
Going forward, I think a person can be mildly bullish on silver, said Sterling Smith, commodity trading adviser and analyst with Country Hedging. But I still look for it to underperform gold. The industrial component is probably going to remain weak, as will the economy probably through the first half of 2011.
Whenever the economy finally recovers, however, silver may gain ground on gold as industrial demand restarts, Smith added.
