Why Silver ETFs Have Underperformed Gold

June 11th at 3:14pm by Tom Lydon

Gold ETFs have corrected hard in 2013 after hitting multi-year highs. Nevertheless, gold has not had it as bad as silver and related exchange traded funds.

The iShares Silver Trust (NYSEArca: SLV) has dropped 29.0% year-to-date, whereas the SPDR Gold Shares (NYSEArca: GLD) has declined 17.7%.

“This is largely because silver, unlike gold, swings between dual roles as a useful industrial metal and safe-haven asset,” according to Morningstar analyst Alex Bryan. “Most of the time, industrial demand drives silver prices. However, during times of market dislocation, high inflation expectations, or economic uncertainty, investment demand for silver becomes the main price driver.”

The dislocation between silver and gold has become more pronounced on speculation that the Federal Reserve will start cutting back its quantitative easing programs in light of the improving economic conditions.

Investment demand for silver has risen over the past few years. According to Silver Seek, investment demand for silver rose to 250 million ounces in 2012 from 100 million in 2005. In 2007, total global silver investment was $500 million, and by 2012, investment demand was valued at around $8 billion.

On the industrial demand side, silver is utilized most heavily in automotive, consumer electronics, chemical and solar sectors.

Currently, demand for industrial metals is down after Chinese data came up short and both the United Nation and the IMF downgraded China’s growth, according to ForexTV. Meanwhile, the U.S. economic expansion was slightly weaker at the end of May, which also weighed on industrial metals.

“The visible underperformance of silver prices was, in our view, heavily influenced by a lack of industrial demand,” Bank of America metals strategist Michael Widmer said in a report. “This is perhaps best reflected in silver imports from the U.S. and Japan, generally hovering well below the longer-term average in the past 18 months. The picture has been similar in China year-to-date. While the country has remained a net importer, shipments have generally not broken out of the longer-term ranges.” [Good News, Bad News For Silver ETFs]

For more information on silver or gold, visit our precious metals category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own GLD and SLV.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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