All that glitters isn’t gold—it can be silver, too.
Topping $20/ounce for the first time since 2016, silver shimmered through its best quarter in nearly a decade during Q2 of 2020.
Gold, currently trading above $1,800/ounce, may be closer to its all-time high of $1,920, but silver has actually had the better run since mid-March. Silver prices are up over 50% since early spring, while gold is now the precious metals “laggard,” gaining only 20% during that same period.
Economic uncertainty usually pushes demand for precious metals higher (as well as their underlying prices), and the trading behavior of gold and silver—not to mention platinum and palladium—in 2020 holds to that axiom.
Earlier this year, Luckbox reported that precious-metal miners had performed particularly well after the stock market bottomed during the 2008-2009 Financial Crisis. History has repeated itself as miners have shown undeniable strength since equities bottomed in March.
Since March 13, the VanEck Vectors Gold Miners ETF (GDX) is up 115%.
Historically, gold and silver share a very strong positive correlation (~0.88), which means it shouldn’t come as a surprise silver prices have increased steeply as well. iShares Silver Trust (SLV), one of the best-known exchange-traded funds (ETFs) in the silver universe, is up roughly 70% since March 20.
Traders of commodities such as gold and silver often use specific metrics to analyze the relative value of two products from the same futures category. For precious metals traders, one metric often referenced is the Gold-Silver Ratio.
The Gold-Silver Ratio is calculated by dividing the price per ounce of gold by the price per ounce of silver. That shows how many ounces of silver are required to buy a single ounce of gold.
For example, at the start of 2019 gold was trading for roughly $1,283/ounce, and silver was trading for $15.70/ounce. That meant approximately 82 ounces of silver were required to purchase a single ounce of gold.
Last summer, the Gold-Silver Ratio climbed to a 30-year high, at about 93. But silver prices did catch up to gold, pushing the ratio back down to 80 by September 2019.
The action in the Gold-Silver Ratio has been much the same in 2020.
Gold rallied fiercely at the start of 2020, pushing the ratio near the top of its historical range—over 100. However, with silver catching up in recent months, the ratio has moderated and is now trading in the low 80s.
That pattern may be worth noting, for future reference.
Switching from quantitative to qualitative factors, the current rally in silver has been linked to a demand-supply development that affects silver more than gold.
Unlike gold, silver is used in manufacturing. In fact, silver is vital in the production of solar panels and communications equipment; both have grown prodigiously in the “digital economy.” An estimated 85% of the demand for silver comes from industrial sources.
During the coronavirus crisis, operations at many of the world’s largest gold and silver mines have been disrupted by outbreaks. While that has interrupted both supply chains, it’s arguably a bigger issue for the silver needed in manufacturing.
With that in mind, it’s easier to understand why silver has been racing higher of late. But silver remains much farther than gold below its all-time highs.
The highest price silver has ever reached was $49.45/ounce in January 1980. As of July 22, silver was trading at $23.09/ounce, which means it would need to rally roughly 114% to match that record level.
Gold, on the other hand, is currently trading $1,864.70, with an all-time high of $1,920.30 on Sept. 11, 2011. That means gold would need to rally only another 3% to displace its previous all-time high.
To learn more about the precious metals trade, readers may want to review a recent installment of Small Stakes on the tastytrade financial network. Another installment from this series helps put precious metals valuations in terms of the equity markets.
For specifics on the Gold-Silver Ratio, this previous episode of Options Jive is also recommended.
“Sage Anderson” is a pseudonym for a contributor who has traded equity derivatives and managed volatility-based portfolios as a prop trading firm employee. He is not an employee of Luckbox, tastytrade or any affiliated company. Readers may direct questions about this blog post, or any other trading-related subject, to firstname.lastname@example.org.