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Do the Decreasing Bullion Prices Have an Increasing Spread?

Meera Shawn - Author

Nov. 20 2020, Updated 10:54 a.m. ET

Gold/Silver spread

With a continuous positive outlook for the US economy, there is little hope that precious metals will see a remarkable upward move. Concerns are rising among the gold and silver miners in terms of the viability of their mining activities. The US dollar is gaining value and has been up by close to 8% on a year-to-date basis. The strengthening US dollar is making gold investors jittery.

The gold/silver spread represents silver ounce (XAG) per gold ounce (XAU). A rising spread indicates the weakening of silver against gold, and conversely a declining spread indicates strengthening silver against gold. Moderate changes in the spread occur over a period of years as a result of changing economic conditions. The gold/silver spread in 2009 was close to $70, and in 2011 it was less than $31, indicating a stronger silver as compared to gold. The volatility of the gold/silver spread is less than the volatility of gold and silver individually.

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Similarly, the gold/platinum spread and the gold/palladium spread have been an investment class for many. The trading price of the gold/silver spread on August 7 was $73.80, which was a loss of 0.62%. The above chart shows the performance of the gold/silver spread with the 50-day moving average of the spread. During the last few trading days, you can see that the spread is coinciding with its 50-day moving average. The convergence may likely be due to the current buoyant markets.

Options performance

The open interest on gold options is overweight compared to the open interest on gold futures. Higher open interest likely signifies a preference for options. The options on gold and silver seem to be dominated by the put being higher than the call. This a clear bear market indicator. With the current uncertainty among the precious metals, investors may turn to options due to their comparative risk aversion.

Mining companies have taken a much bigger hit compared to gold and silver themselves. Among the largest losers in the VanEck Vectors Gold Miners ETF (GDX) are Oceana Gold (OGC), New Gold (NGD), and Coeur Mining (CDE). August 7, the big data day, was good for most of the miners with Iamgold (IAG) being one of the top performers with a gain of 4.70%. These stocks together contribute close to 4.36% to the GDX. The SPDR Gold Shares (GLD) saw an up day owing to higher gold prices than the previous day.


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