Why silver may not outshine gold after all

NEW YORK (july 22) Silver will continue to underperform gold, according to a report from Capital Economics, despite a recent spike in prices of the silver metal.

The price of silver was up by almost 5 percent at $20.42 per ounce on Monday, after hitting a low of $18.22 on June 28 over concerns the U.S. Federal Reserve was about to wind down its monetary stimulus – a major driver of precious metal prices.

But Capital Economics highlighted that silver's recovery had lagged behind gold, which hit a month-high of $1,327 per ounce on Monday, after falling to $1,180 in June. Comments by Fed Chairman Ben Bernanke last week helped abate fears of a swift end to monetary easing, helping prices gather momentum.

"The analyst consensus is that the price of silver is likely to outperform that of gold, as both continue to recover in the next year or so," said Capital Economics's Ross Strachan and Julian Jessop, in a research note published on Monday. "However, silver is still lagging behind, and there are at least three good reasons to expect this underperformance to be extended."

The analysts highlighted that silver prices are more volatile than gold prices. The market is smaller and more sensitive to external price movements because it is often mined alongside other products.

"The much larger losses in the recent past will now make investors more wary of silver on a risk versus reward basis," Capital Economics said.

The metal is more vulnerable to global economic weakness – especially in China and Europe – because of its use in industry, Strachan and Jessop added. Industrial use accounts for almost half of silver demand, compared with just 10 percent of gold. 

The analysts also stressed that silver was much less likely than gold to benefit from household demand. "Silver simply does not have the same cultural or sentimental appeal as gold, nor is it as well-established as a financial asset," they said.

Capital Economics' note came after a number of analysts have argued that silver could outperform gold, looking ahead.