Comparing the Movements of Gold and Silver by Spread Analysis



Volatility analysis

When we compare the volatilities of gold and silver, we have to remember that silver is a precious metal as well as an industrial asset. One analysis that we use is a comparison of implied volatilities. Call implied volatility is a measurement of the fluctuations in the price of an asset, given the changes in its call price.

On October 5, the call implied volatility of gold was 10%, while that of silver was 16.6%. Notably, the iShares Gold Trust (IAU) and iShares Silver Trust (SLV), which are well-known trackers of these metals, have seen YTD (year-to-date) gains of 10% and 3.8%, respectively, with 30-day trailing losses of 0.97% and 0.32%, respectively.

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The above chart shows the ups and downs in the gold-silver spread. An increase in the spread shows that silver is losing strength against gold and that it would take a higher amount of silver ounces to buy a single ounce of gold. Similarly, a drop in the ratio shows strength for silver against gold.

Spread analysis

The gold-silver spread is a measurement of the price of one ounce of gold in relation to silver. On October 5, 2017, the gold-silver spread was 76.1, which indicates that it takes almost 76 ounces of silver to buy a single ounce of gold. The RSI (relative strength index) of the gold-silver spread is now 62.6.

As you can see in the graph above, the spread declined steadily after the start of 2016, indicating that silver became stronger against gold.

Notably, the mining stocks that are significantly impacted by the interplay between gold and silver and the overall mining industry include Barrick Gold (ABX), Agnico-Eagle Mines (AEM), Silver Wheaton (SLW), and First Majestic Silver (AG).


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