If you think the past nine days have been tough for gold prices, then you must not have owned any silver.
Although the iShares Silver Trust (SLV) left the SPDR Gold Shares (GLD) in the dust when both metals turned around back on June 27, silver has more than paid the price for that frothy runup, in the form of a relative drubbing. While gold is off about 3.6% since the late-August peak, silver’s given up more than 6.1% of its value since then.
What’s the deal? And more than that, what does the future have in store for both of the precious metals?
As has always been the case, it’s a complicated — though interesting — answer:
Is Silver Now Shinier Than Gold?
There’s certainly no shortage of theories about why silver had been so much stronger than gold when both rebounded 10 weeks ago.
Anthem Blanchard, CEO of gold and silver bullion dealer Anthem Vault, believes a tight silver supply (relative to consumption) explains the metal’s relative volatility. It’s not a bad theory. Whereas jewelry-driven and speculation-driven demand for gold (which together account for about two-thirds of total gold demand) can vary greatly from one quarter to the next, silver usage is not nearly as elastic. About 80% of silver, on the other hand, is used for industrial purposes; industrial organizations have little flexibility in the amount of silver they have to consume to meet demand.
Another brilliantly simple theory notes how silver lost far more ground following the September 2012 peak of both commodities, and so had more ground to reclaim with the undertow shifted back in a bullish direction.
It was Libertas Wealth Management Group’s president, Adam Koos, however, that posed one of the most compelling and most meaningful possibilities, saying, “People like new and exciting, and gold might be becoming old hat to some.” The idea makes sense.
Which is it? Most likely a combination of all three, though pinning a reason on the recent comparative performance of gold and silver is merely academic at this point.
So … what’s next?
What It’s Not
As for where each metal is headed next, although the speed and distance of any impending moves might be different for the two metals, gold and silver are still due to suffer the same basic fate. Ergo, if you get a bead on one, you’ll have a bead on the other.
Gold remains the most watched metal, so we’ll focus there first.
For a little perspective, gold’s recent weakness isn’t necessarily being prodded by the usual suspects of inflation and the value of the U.S. dollar. The greenback has been losing value since the 5th, which should have been bullish for gold. And, inflation — as implied by the interest rates on 10-year Treasuries — has been on the rise since early May and certainly still has been going strong for the past couple of weeks. That should have pushed gold upward as well, but it didn’t.
The proverbial “So what?” is the fact that gold has once again disconnected itself from its normal, underlying fundamentals and is now being pushed and pulled as a speculative instrument. That’s not a bad thing or a good thing. It’s just something to be aware of, and makes a good read on a chart the most important piece of a trader’s arsenal.
On that note …
The Charts Explain the Swings
In retrospect, the peak at $137.55 that the SPDR Gold Shares made back on Aug. 28 is neither surprising, nor a reason to expect the ETF to keep tumbling. That level is a key 38.2% Fibonacci retracement line, which is any chart’s natural, “organic” floor and/or ceiling.