Something Strange in the Precious Metals Neighbourhood

In most circumstances and according to historic data, the silver market responds alongside gold, and in most instances it outperforms gold. However, looking at the latest empirical evidence, it seems that silver is having a lot of issues keeping up with the ‘godfather’ of precious metals.

Over the last decade or so both metals have had a significant correlation of 0.81 and any movement made by gold, silver amplifies it by 45 % (based on a regression analysis using SPSS statistical software) this means a rise in gold by 1 % would stimulate silver to rise by 1.45 %, this is however not the case for 2016. Gold was seemingly up by 17 % this year and the first 10 % took place at the very beginning of the year which means, silver should have risen by approximately 25 %, this was not the case, as silver only rose by about 8 % at the peak of gold’s rise, some analysts are even stating that this is the first time this phenomenon is taking place.

This situation could also be due to the fact of silver’s quasi industrial status. The fact that although silver is considered a precious metal, it is also widely used by industries, and a slow growth in the industrial sector (fingers pointing at China) could bear down on not only silver, but also copper, nickel and others, which have somewhat rebounded and outperformed silver.

This according to most analysts is due to the position of silver as an industrial metal rather than a precious metal and because most of gold’s rally was driven by investor fear, the glut in demand moved on the price of silver negatively. Another factor that must be taken into consideration at this juncture is that silver is rarely mined alone, it is usually the by product of gold mining and as gold producers are relaxing production with the hopes of ushering gold prices up, the production of silver has also slowed and the spike by silver was not supported by demand from investment level gold buyers.

Meanwhile, the recent hike by the Feds on rates has also had a tremendous impact on the precious metal market in general as investors’ shift their focus towards better returns as the cost of holding precious metals becomes a nuisance.
However, most investors are not just holding on to their precious metals, they are also using the current lower prices to bring their average per ounce of holding to lower levels ahead of the expected breakout.

A lot of contradicting theories and speculation is currently shrouding the industry making it difficult to tell if whether gold is going to break out or slump backas some are expecting it to below USD 1000 per ounce, which should not necessarily mean bad news as it would give investors greater leverage to bring their average cost/ ounce lower than it ever was.

The truth is that, no matter what happens, gold will rally soon enough and silver is most likely to follow suit although not as robustly as it did before

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