The weakness in the global financial markets has helped precious metals, like gold and silver, to recover their sheen in 2016. Sluggish growth in China since the beginning of the year and the global oil market turbulence has lifted safe-haven demand.
The jump in gold and silver prices was also supported by plunging interest rates on a global scale. With the Fed not expected to raise interest rates in the near term, the rally is expected to continue.
While gold has gained 18% and 11% year to date and in the past one month, respectively, silver has risen 10% so far this year and just 4.4% in February.
Will the Trend Continue?
Gold and silver prices have exhibited a strong correlation in the past 10 years. In fact, some investors regard silver as a leveraged play on gold. Per a regression analysis based on FactSet data, silver prices move 1.4 times the increase in gold prices on an average. In other words, if gold rises by 1% in a particular session, silver is expected to gain 1.45%.
However, this year prices have gone the other way round as evident from the year-to-date and monthly figures. The outperformance of gold can be due to the fact that silver is widely used for industrial purposes. Weak manufacturing activities across the globe, particularly in China, have hurt the demand for the white metal, affecting its price.
How to Play?
But history they say repeats itself and the appreciation of gold prices over silver is not likely to be sustainable over the long run. This is because conditions in the U.S. market are slowly improving and industrial demand for silver is expected to get a boost from stepped-up domestic economic activity. Additionally, silver supply could contract given the dearth in deposits faced by the silver miners, forcing producers to look for fresh projects.
Meanwhile, investors returned to risk-on trade sentiment in the recent week, which could affect the demand for gold bullion. Investors could play the market by going long on silver and short on gold.
Below, we have highlighted some of the silver and inverse gold ETFs. Investors should note that since these inverse products when combined with leverage are very volatile, these are suitable only for traders and those with a high-risk tolerance and short-term outlook. Additionally, the daily rebalancing - when combined with leverage - may force these products to deviate significantly from the expected long-term performance figures.
Still, for ETF investors who expect the outperformance of gold over silver to be short-lived, the products discussed below could make for interesting choices.
Long on Silver
iShares Silver Trust ETF (NYSEARCA:SLV)
The fund tracks the price of silver bullion measured in U.S. dollars. It is the ultra-popular silver ETF with AUM of over $5 billion and heavy volume of nearly 6 million shares a day. It charges 50 bps in fees per year from investors. The fund holds a Zacks ETF Rank #3 (Hold) with a High risk outlook and has returned 10.2% so far this year.
ETFS Physical Silver Trust ETF (NYSEARCA:SIVR)
This fund has amassed $227.8 million in its asset base while trades in moderate volume of more than 82,000 shares per day on average. It tracks the performance of the price of silver less the Trust expenses and is backed by physical silver. Expense ratio is 0.30%. The fund also holds a Zacks ETF Rank #3 (Hold) with a High risk outlook and has returned 10.4% so far this year.
PowerShares DB Silver ETF (NYSE:DBS)
This product provides exposure to the silver futures market rather than spot market and tracks the DBIQ Optimum Yield Silver Index Excess Return index. It is has AUM of $19.5 million and average daily volume of less than 3,000 shares, increasing the total cost for the fund in the form of a wide bid/ask spread. DBS is the high cost choice in the silver bullion space, charging 79 bps in fees per year from investors. Like other silver ETFs, the fund holds a Zacks ETF Rank #3 (Hold) with a High risk outlook. In the year-to-date period, it has gained 10.4%.
Short on Gold
ProShares Ultra Short Gold ETF (NYSEARCA:GLL)
This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of gold bullion in U.S. dollars; the gold price is fixed for delivery in London. GLL gains when the gold market falls and is appropriate for hedging purposes against the decline in gold prices. With an expense ratio of 0.95%, the product has AUM of $47 million and average daily volume of 21,000 shares.
DB Gold Double Short ETN (NYSEARCA:DZZ)
This ETN seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold. DZZ initiates a short position in the gold futures market but charges a relatively lesser price of 75 bps a year. The product has amassed over $49.6 million in AUM. The ETN has volume of 432,000 shares a day.
VelocityShares 3x Inverse Gold ETN (NASDAQ:DGLD)
This product provides three times (300%) short exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. This $9.9 million ETN charges 135 bps in fees per year from investors and has average daily volume of 24,000 shares.