Are Silver ETFs Shining Too Brightly?

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 |  Includes: SIVR, SLV
by: Tom Lydon
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Precious metals have been on a streak, especially silver. Silver exchange traded funds (ETFs) have been steadily appreciating alongside the precious metal, but some observers are concerned that silver may be outpacing the golden ratio.

In the past 15 months, silver has appreciated 88% while gold has gained 27%, writes Abraham Bailin for Morningstar. Precious metals have proven to be an important portfolio diversifier, outpacing the S&P 500’s performance of 19% across the same period.

There has been a long held belief that the gold-to-silver ratio is around 16, but the average ratio for the last 30 years has been about 63 – the ratio currently sits below 40. Over the last 25 years, silver has become expensive relative to gold only twice, and in both occasions, the prices only lasted for a few weeks before normalizing.

Bailin argues that if the traditional ratio holds, gold will continue to gain around 6%, or $80 dollars, or silver prices will drop but still maintain its 52-week range. However, gold ETFs have been experiencing outflows every month since last October, whereas silver ETFs have seen steady inflows with only a single month of moderate outflows.

Physically-backed precious-metals ETFs have gotten a bad rep over the fact that they are backing shares with bullion stored in vaults, which have dwindled supply of their target metals, and thus putting pressure on the price. But there are other demands on the metals too.

Industrial demand has kept silver prices up. For 2009, industrial demand made up 41% of total silver demand, and that figure is expected to grow. Additionally, some observers have attributed the run up in prices to loose monetary policies, inflation and flight to safety.

  • iShares Silver Trust (NYSEArca: SLV)
  • ETFS Physical Silver (NYSEArca: SIVR)

For more information on silver, visit our silver category.

Max Chen contributed to this article.