Are Gold and Silver Walking Hand-in-Hand?



Gold and silver returns

The past week has been negative for all four precious metals. Gold, silver, and platinum have fallen 1.7% apiece during the past five trading days, while palladium has fallen 2.7%.

But if we look at the 30-day-trailing returns, gold has fallen 1.3%, but silver has been buoyant, increasing ~0.54%. Often, the volatility in silver is higher than it is in gold, likely because silver is an industrial metal, while gold has fewer industrial applications.

As of October 23, the call implied volatility in gold was 11.1%, while the call implied volatility in silver was 18.1%. (Call implied volatility is a measurement tool of the fluctuations in the price of an asset, given the price changes in the asset’s call option.)

Gold and silver can be closely tracked by way of investments in the iShares Gold Trust (IAU) and iShares Silver Trust (SLV). These two funds have seen YTD (year-to-date) gains of 11.3% and 6.8%, respectively.

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Spread analysis

To understand the relationship between gold and silver, we also have to analyze the spread ratio between the two. The gold-silver spread measures the number of silver ounces it takes to buy a single ounce of gold. This spread was at 74.8 on October 23, which mean that it took almost 75 ounces of silver to buy a single ounce of gold that day.

As you can see in the graph above, this spread has declined steadily after the start of 2016, which means that it now takes fewer ounces of silver to buy one ounce of gold. But any rise in this spread indicates strength for gold and weakness for silver.

Mining stocks that are significantly impacted by the interplay between gold and silver and the overall mining industry include Franco-Nevada (FNV), Hecla Mining (HL), Coeur Mining (CDE), and Royal Gold (RGLD).


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