Is now the right time to jump on the silver bandwagon? (Part 2 of 3)
First, it’s worth putting silver’s recent rise in context. Here are three important facts about the recent rally.
1. While the metal has had a respectable run over the past month, silver is still playing catch-up after losses earlier this year. Between late February and early June, silver prices fell roughly 15%. In addition, even with the recent rally, for the first half of the year silver has trailed gold, which has gained nearly 10% versus roughly 7.5% for silver. Prices are based on spot prices for both gold and silver from Bloomberg.
2. The recent jump in silver prices is partly a function of the metal’s volatility. Silver tends to be a relatively thinly traded market. As a result, price movements – both gains and losses – are more pronounced. Looking at monthly price data over the past forty years, gold prices have had an annualized volatility of roughly 20%. While this is high – about a third higher than that for U.S. equities – it pales in comparison to silver prices, which have an annualized volatility of nearly 35%.
Market Realist – Historically, silver (SLV) has always been more volatile than gold (IAU). The following graph compares ETF volatility for silver and gold ETFs over the past three years.
Silver demand is elastic compared to gold demand because silver isn’t used just for monetary purposes, like gold, but also for industrial use.
3. Part of the reason that both silver and gold have advanced this year is that interest rates have unexpectedly dropped. Commodities in general, but precious metals in particular, tend to produce higher returns when real rates are lower. Real yields – based on yields of 10-year Treasury Inflation Protected Securities (TIPS) – were 0.76% at the end of 2013 versus approximately 0.25% today.
Looking forward, however, this environment is unlikely to continue. I expect real rates to start to back up in the second half of 2014. This suggests a tougher second half for precious metals, particularly for gold, which has historically had the stronger relationship with real rates.
Browse this series on Market Realist:
- Part 1 - Should you jump on the silver bandwagon?
- Part 3 - Should you invest in silver and gold stocks or ETFs?
- Commodity Markets