What Gold’s Strength over Silver Tells Us
Gold versus silver
Silver is known to be more reactive than gold as its volatility is much higher. Silver is known as “poor man’s gold,” and due to its low price right now, volumes in silver could remain higher going forward. In the past month, silver has dropped 4.9%, while gold has dropped only 1.9%.
Silver also almost always follows the trend in gold, but sometimes it shows its industrial traits as well. Silver is extensively used for the production of electronic items and solar panels.
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But many of the factors that impact gold also play on silver, including the interest rate, the US dollar, market volatility, and geopolitical tensions.
The funds that closely track the rise and fall in gold and silver include the iShares Gold Trust (IAU) and iShares Silver Trust (SLV). These two funds have seen YTD (year-to-date) rises of 8.5% and 4.5%, respectively.
The gold-silver ratio
To understand the relative performances of gold and silver, we have to examine the gold-silver spread or ratio. In simple terms, this spread is a measure of the price of one ounce of gold in terms of silver.
As of June 27, the gold-silver spread was 74.6. This indicates that it takes almost 75 ounces of silver to buy a single ounce of gold. The spread has increased slowly over the past month. It touched a peak of 85 in late 2008. The RSI (relative strength index) level of the gold-silver spread is now at 66.3.
Any rise in the ratio points to the comparative strength of gold over silver. A higher ratio suggests that it takes more ounces of silver to buy one ounce of gold. Similarly, any fall in the ratio indicates strength for silver.
Mining shares that are significantly impacted by the interplay between gold and silver and the overall mining industry include First Majestic Silver (AG), Silver Wheaton (SLW), Alamos Gold (AGI), and Kinross Gold (KGC).