By Panos Mourdoukoutas
The new quarter started with big declines for precious metals. iShares Silver Trust (NYSEARCA:SLV) was down near 3 percent, while SPDR Gold Shares (NYSEARCA:GLD) was down a little over one percent. Does it mean that the precious metals rally is over? Should investors avoid precious metals altogether, or even go short?
As we wrote in a recent piece (3 High Risk Trades to Avoid), investors should avoid buying commodities, as a fast run-up and weak fundamentals make this sort of trade exceptionally risky. But aggressive investors may want to short gold and silver, as they both are sensitive to a strengthening dollar, a change in monetary policy, and a weakening global economy. Gold is further sensitive to central bank sales.
But when the two investment positions are compared, the silver short position is a better bet, for three reasons:
- Price appreciation. Since 2009, silver has appreciated 350 percent, while gold has appreciated by 100 percent only. For the year, silver is up 80 percent and gold is up 23 percent. Since both commodities are purchased as precious metals, standard economic theory suggests that when the price of a commodity rises faster than substitutes, buyers reach for the substitutes.
- The silver-gold anomaly. For almost a decade, silver has been rising at the same or at a slower pace than gold. Since last October, however, the two metals have reversed fortunes, as silver rose by leaps and bounds. And even after the recent correction, silver’s growth remains above that of gold. If the price pattern is to reverse to the norm, the price of silver must drop substantially.
- Silver is more of an industrial material than gold. Therefore, it is more sensitive to a weakening economy that may be in the cards after the end of QE2 in the US, the ongoing debt crisis in Europe, and the tightening of bank reserves in China.
The silver-gold “anomaly” (click to enlarge image):