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.
[related_stories]Deflation would run counter to the bets some traders are currently making as they scurry into Treasuy Inflation Protection Securities (TIPS), betting the Fed is under-estimating how much inflation is poised to rise.
On the supply side, silver miners are finding less deposits and producers are expanding into new projects, which suggests that silver could be in shorter supply ahead.
“A further increase in negative rates would be very positive for gold, despite the fact that it’s soared year to date. If US banks try to pass negative rates onto depositors, many would pull money out and buy gold. Gold earns zero interest—but that beats getting charged just to hold your money in the bank,” adds HardAssets Alliance.
iShares Silver Trust
Tom Lydon’s clients own shares of GLD.