Streets Paved with Gold… or Silver?

Global inflation and market uncertainty in 2011 have resulted in a dramatic rise in the price of precious metals, with gold and silver reaching fresh highs this week. But which is the better investment?

In Monday-morning trading this week, gold prices hit an unprecedented $1518 per ounce, while the cost of silver also jumped to $49.82 an ounce – just shy of its all-time high of $50.35.

Although gold is grabbing all the headlines at the moment, with some analysts predicting a rise to $1600 by year-end, in absolute terms it appears that silver is outshining its more expensive cousin. Since the beginning of the year silver has risen in excess of 22%, compared to an increase of just over 12% for gold.

The gold/silver ratio, which gives the amount of silver required to buy a single ounce of gold, now stands at around 1:33, its lowest level since October 1983. This is in stark contrast to last year, when the ratio peaked at 1:65. But what are the reasons for this sudden increase in the relative price of silver, and is there further upside left?

A correction on the cards?

The past few months have seen a three-pronged geopolitical threat to stock markets. Unrest in the Middle East and North Africa, along with the Japanese earthquake and the eurozone sovereign debt crisis, has caused a great deal of investor uncertainty. In times like these, safe-haven assets tend to gain in value, and we have seen a corresponding jump in the price of gold and silver over this period.

As these concerns ease, the worry for those bullish on silver as opposed to gold is that this rally cannot be sustained. Silver prices are close to their record levels and since silver is much more volatile than gold, any profit taking could result in a big swing to the downside.

Silver lining

However, rising inflation in Europe, the US and China is likely to continue to push investors towards precious metals as a hedge. With no signs of inflation abating, and the UK and US central banks averse to raising interest rates over concerns about damaging growth, it looks like this could drive gold and silver higher in the short/medium term.

Silver, however, has the added benefit of being used extensively in industrial production, which may help explain why it has outperformed gold so far in 2011. One of the main growth areas for silver is as a replacement for lithium in rechargeable batteries, particularly of the type used in smartphones and other mobile devices. Demand for it is therefore likely to increase during times of economic prosperity.

As western economies begin to establish a platform for growth following the global economic crisis, demand for silver may grow. Also, increasing affluence in the emerging world means that more people can afford jewellery. Gold is now almost prohibitively expensive, and so silver may be increasingly in demand as the cheaper alternative. With around 700-800 million ounces in circulation, silver could be considered very tightly held. Should demand begin to outstrip supply, further upward pressure on silver prices would be the likely result.

Learn more

Want more information on silver and gold? Our Commodities Update provides a weekly round-up of the latest commodity news in the UK, and this week gold is in the spotlight.

If you are an account holder with IG Index, you can also access our latest in-depth report on silver, compiled by our Head of Research. The full version is available in the Research Articles section of the TradeSense Databank, accessible once you have logged in to our dealing platform. Non-clients can view a summary of the report here: Silver as an Investment.

Take a position

Will silver manage to outperform gold? Or will the yellow metal continue to appreciate while silver stalls? With IG Index you can bet on a wide range of commodities, including spot and future prices for both gold and silver. We also offer bets on stock indices, as well as forex and over 7000 individual shares. If you don’t already hold an account with us, you can apply online now, and start spread betting today.

The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.

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