Gold and Silver Diverge as Investors Favour the Yellow Metal

Silver typically does what gold does, only more so. But it now appears to be having trouble keeping up the pace.

Over the past 10 years, the two metals have enjoyed a very tight correlation of 0.81. And each daily move in gold has tended to be amplified by 45 percent for silver, according to a regression analysis based on FactSet data. In other words, if gold rises 1 percent in a particular session, silver could be expected to jump 1.45 percent.

This year, however, silver is lagging.

Gold is up 17 percent in 2016 and 10 percent in the past month alone. Silver, meanwhile, has risen just 8 percent this year and 5 percent in the past month.

“Considering how highly correlated silver is to gold, I find it interesting to see such a divergence over the last two to three weeks,” Cowen head of equity sales trading David Seaburg wrote to CNBC. “Actually, it’s the first time I have ever seen a gap like this.”

One potential culprit is silver’s quasi-industrial status. While silver is often considered a precious metal, it also has industrial uses. A weak global industrial environment, particularly in China, has weighed mightily on purely industrial metals like copper and nickel — although to be fair, both have rebounded nicely over the past three weeks.

“Silver is a funky commodity,” longtime commodities trader Andy Hecht commented. “Recently it’s been wearing its industrial hat rather than its precious hat, but that could change.”

Further, gold’s rally this year appears to have been driven largely by investor fear. More classic drivers, such as rising inflation expectations, would likely have a clearer read-through to silver prices.

Either way, the stronger performance by gold is certainly raising eyebrows.

“We’ve had gold lead over the past few years, but now something interesting’s happening. At the resistance levels where you typically see that turn, gold has broken out to the upside,” Oppenheimer head of technical analysis Ari Wald said Wednesday on CNBC’s “Power Lunch.”

“This is a major breakout, and it suggests gold could continue to outperform,” Wald said, suggesting that “the trade is to long gold against a short position in silver.”

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza