Gold and silver prices are seeing a big performance divergence in 2016. Here’s why.
Why Gold and Silver Prices are Diverging (GLD, SLV)
Gold and silver both started surging in January, but silver less so. Silver has also dropped in late February, while gold has held near its 2016 high. This is called divergence. There are a couple reasons for divergence between the movement of gold and silver prices. One is the gold/silver ratio, a method traders use to assess the value of one metal to the other. Another reason for the divergence may be more fundamental, involving the demand and applications of the metals of themselves.
Divergence and Gold/Silver Ratio
Gold and silver are thought to move together, and often they do, as can be seen on figure 1. Figure 1 also shows periods where the Gold Trust (GLD) and Silver Trust (SLV) move in opposite directions, and periods where one metal outperforms the other.
Figure 1. Gold Trust (blue) Versus Silver Trust (red), Percentage Scale (right)
Gold is currently outperforming silver, surging higher, and staying higher, while silver has surged less and has fallen off its recent highs. Such discrepancies occur, and are monitored by the gold/silver ratio. The gold/silver ratio shows how many ounces of silver it takes to buy an ounce of gold. Since 1975 the average is near 60; right now it stands near 83 ($1258 divided by $15.17).
Figure 2. Gold and Silver Price Ratio
While gold out-performance–or silver’s under-performance relative to gold–is very noticeable in early 2016, this has actually been going on for a long time. Figure 2 shows that gold prices have risen relative to silver prices quite steadily for years. This is mainly due to silver price weakness since peaking near $50 in 2011 (when silver outperformed gold).
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