Bullion investors may be rightly impressed by silver’s outperformance of gold this year, but they would be well advised to be wary of seeing the precious metal purely as a cheaper proxy for its yellow cousin.
While gold has grabbed headlines this year with its rally to record highs above $1,385 an ounce, silver has quietly outpaced those gains. A $100 investment in silver on January 1 would now be worth around $146, versus a gold investment's $126.
The prospect of further monetary easing in major economies has favoured the metal on two fronts. It rises with gold as an investment vehicle and alternative to paper currencies, while also benefiting from greater demand for industrial commodities.
This has made silver increasingly expensive compared to gold, with the number of ounces of silver needed to buy an ounce of gold slipping to its lowest in more than two years at 56.7.
“The gold:silver ratio shows quite a nice relationship with appetite for risk and... that has clearly been improved by quantitative easing,” said RBS analyst Daniel Major, pointing to renewed stability in industrial commodities and equities.
“That has a double impact on silver. You have a stronger gold price and weaker dollar as well as improved risk appetite.”
But risks remain. Silver is a very different animal to gold. While industrial offtake is only a small part of gold demand, some 40 percent of silver consumption comes from industrial applications, like electronics manufacturing, which have been hit hard by the downturn.
If precious metals investment loses momentum, any residual support silver takes from industrial demand is likely to kick in well below current price levels.
“The marginal increase in price has come from investment, not from industry,” said HSBC analyst James Steel. “Industrial demand sustained it above $15, but it did not take it over $20.”
If investors continue to favour gold and silver, this is not likely to be an issue. But if gold prices do enter a period of correction, whether large or small, silver is likely to suffer an even sharper retreat.
The silver market is smaller and less liquid than that of gold, meaning price moves tend to be exaggerated.