Listen to What the Gold/Silver Ratio is Saying

The SPDR Gold Shares (NYSEArca: GLD), the world’s largest physically-backed gold exchange traded fund, and rival gold ETFs have been among this year’s best-performing funds. GLD is up nearly 18% year-to-date, but thanks to a recent surge to 10-month highs, silver prices and ETFs are outpacing their gold rivals.

For example, the iShares Silver Trust (NYSEArca: SLV) and the ETFS Physical Silver Shares (NYSEArca: SIVR), two of the largest physically-backed silver exchange traded funds, are sporting year-to-date gains of over 22%.

Unlike gold, silver is used in many industrial applications, but industrial demand is diminishing as global growth, notably China, begins to slow. Industrial demand for silver dipped 0.5% last year on lower demand from Europe and North America. On the other hand, gold has been buoyed this year by accomodative interest policies throughout the developed world. That includes the Federal Reserve, which has been reluctant to raise interest rates with few traders betting that is going to happen at the Fed’s April meeting.

Still, the gold/silver ratio is worth listening to and some market observers believe the ratio is sounding a potentially ominous tone for other assets.

“One might argue that the gold-silver ratio could go up, but the point is that the correlation is already at an extreme. If the two assets close the gap and return to normal, deflation could increase dramatically,” according to Hard Assets Alliance.