When Gold ETFs Sell Off, Do Other Precious Metals Follow?

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 |  Includes: GLD, PALL, PPLT, SLV
by: Eric Dutram

One of the biggest stories in the ETF world over the past few trading sessions has been the Gold SPDR (NYSEARCA:GLD) taking the top spot among the most widely-held ETFs, finally surpassing SPY for the AUM crown. Yet, just as soon as this happened and gold hit $1,900/oz., investors saw a brutal sell-off in the precious metal, causing prices to fall to their current level around $1,770/oz. While the reasons for this decline are unclear - some blame profit-taking while others point to market manipulation - one has to wonder if a similar situation plagued the rest of the precious metal group and their respective ETFs, specifically, silver, platinum and palladium.

Thanks to some gains in Thursday’s session, as well as strong buying to start the week, GLD is now down just 3.4% over the past five days. While the rest of the precious metal group is also experiencing losses, they vary significantly from metal to metal. The most popular Silver ETF, SLV, is showing losses of roughly 2.6% for the period while the platinum (NYSEARCA:PPLT) and palladium (NYSEARCA:PALL) funds, both from ETF Securities, are showing losses of just 1.5% and 0.5%, respectively.

This trend in variation is confirmed by a longer term view of the markets as well. In fact, over the course of 2011, SLV leads the way, showing gains of 40%, while GLD is up roughly 27% in comparison. The two more ‘industrial’ metals of the group, palladium and platinum, are sporting returns of -6.8% and 2.3%, respectively, further demonstrating how different returns can be in this group of metals. This suggests that although many investors may group the metals into the same category, that is probably not very wise from a return perspective, given how the metals each react differently to macroeconomic events.

For example, gold is clearly viewed primarily as a safe haven metal. The product has little use in the industrial sphere and has been used and thought of as money for thousands of years. Meanwhile, silver also shares some of the monetary characteristics with gold, but silver has far more industrial uses than its more precious cousin. In fact, the majority of silver consumption goes to industrial purposes so the metal is just as impacted by fears of inflation and currency debasement as it is by economic growth and industrial production. For platinum and palladium, the uses are almost exclusively in the industrial sphere so they tend to sink when economic environments deteriorate and surge when consumption levels are robust. Since both products are used extensively by the automotive industry, they also tend to be tied to car production and demand more than as an alternative to money, as silver and gold often are.

Domino Effect?

Clearly, although all four of these precious metals share numerous physical properties, their investment experiences can often differ by extreme amounts. Investors need to take this into consideration before buying any precious metal ETF in order to make sure that the metal they are purchasing matches their outlook for the economy. Silver ETFs are probably best for speculators or those looking to make a hedged bet on the economy, while gold is often a better choice for those looking to make a play against the dollar or are expecting more hardship ahead. Meanwhile, palladium and platinum often follow each other, but investors should remember that platinum, thanks to its high per ounce price, is often a more stable play and could be the choice for those looking for more stability in the surprisingly varied precious metals market.

Disclosure: Long gold and silver bullion, IAU.

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