Silver's Volatility Makes It The Precious Metal Of Choice
London (Sept 6) Silver attracts many market participants for two crucial reasons. First, it is far more volatile than the price of gold, and many speculators equate volatility with opportunity. Second, and perhaps more significantly, silver is cheaper on a per-ounce basis than gold. If gold is a blue chip stock, then silver is a penny share. Some investors and traders prefer owning massive amounts of a less expensive asset than a small amount of a precious one.
Silver has been gold's little brother for thousands of years. When you think of money, if precious metals were currency, then silver is the coin and gold the note. The first Egyptian pharaoh, Menes, established the value relationship between the two metals when he said that two and one-half parts silver equal one part gold in around 3100 BC. Silver and gold both have a long history as symbols of wealth, power and value. At the Rio Olympics, the silver medal was solid silver. However, due to the high price of gold, which currently trades at over seventy times the price of silver, the Olympic gold medallion was 98.8% silver and only 1.2% gold.
The first place finishers in Rio received a lot more silver than gold for their efforts and silver became the leader when the entire precious metals sector began a correction that has taken the prices of all of the rare and shiny commodities lower.
Silver leads precious metals lower
Sometimes silver leads precious metals and at times it is a follower. While gold rallied out of the gate in 2016, silver needed more proof before it would follow. The silver-gold ratio, first mentioned by Menes, has averaged 55:1 or 55 ounces of silver value in each ounce of gold value over the past four decades. This March, the ratio rose to the highest level in twenty-one years.
As the weekly chart of the silver-gold ratio demonstrates, the price relationship between the two metals rose to over 83:1 in March, the last time it traded this high was in 1995. Then, the ratio began to drop when silver finally became a believer and rallied, following gold and reaching highs of over $21 per ounce in early July. The ratio fell to 66.2:1 when silver hit highs as silver became the leader of the precious metals pack.
However, when precious metals stalled and began to correct, silver came down harder and faster than gold and the ratio moved back to over 70:1, but as of last Friday it was at the 68.5:1 level.