Something Strange With Precious Metals

Rachel Gearhart
by Rachel Gearhart, Managing Editor

There’s no doubt that since oil prices dropped in June, precious metals have taken a hit. But despite their dirt-cheap prices, so far in 2015 gold appears to be in rally mode and silver is up 4.4%.

Also, adding to a slew of other hawkish data, a recent U.S. jobs report indicated that there was a drop in hourly wages. This suggests that the Fed may hold interest rates for a while, putting the dollar under pressure.

The pressure on the dollar makes gold and silver less expensive for buyers using other currencies - meaning that these precious metals could continue to rise.

But there’s something even more interesting going on with gold and silver. It has to do with their relationship to their respective ETF holdings.

This week’s chart compares the silver spot price and silver ETF holdings to the gold spot price and gold ETF holdings. Traditionally, as spot prices fall, precious metal ETF holdings fall in tandem. As you can see from the chart, gold is sticking to this trend.

Silver, on the other hand, is doing something entirely different. As the silver spot price decreases, the amount of silver ETF holdings actually increases.

Why is this happening? It’s simple - silver investors and the many industries that use the metal are traditionally more sensitive to price. Historically, the price elasticity of silver demand is much higher than that of gold. In simple terms, this means demand goes up when prices go down. It’s added proof that silver buyers are more focused on fundamentals, rather than the story behind the asset.

Gold is considered the ultimate safe haven, while silver and its many industrial uses doesn’t have quite the shine that attracts the perma-bear crowd.

Investors recognize that while silver is dirt cheap, it’s a very attractive investment for precious metals investors.

Editorial Note: While silver may be looking up for 2015, it’s no surprise that there are some oil and gas companies that aren’t sharing the same fate. And they could bring down your entire portfolio. In his recent report, Energy and Infrastructure Strategist David Fessler discusses the 19 stocks that are toxic to your portfolio.  Click here to find out which stocks to steer clear of.

Chart of the Week
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