After rising nearly 12% from its June lows, silver has been
garnering some attention in recent weeks, as investors and market
watchers look for something to get excited about amid the broader
and slow grind higher. It's no wonder, then, that many are asking
whether it's time to jump on the silver bandwagon.
My take: Despite the precious metal's recent rally and though
silver may be somewhat more interesting than gold, I'm not
convinced that this is a market that most investors want to
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
. 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,
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%.
3. Part of the reason that both silver and gold have
advanced this year is that interest rates have unexpectedly
. Commodities in general, but precious metals in particular, tend
to produce higher returns when real rates are lower.
- based on yields of 10-year Treasury Inflation Protected
) - were 0.76% at the end of 2013 versus approximately 0.25%
Looking forward, however, this environment is unlikely to
continue. I expect
real rates to start to back up in the second half
. This suggests a tougher second half for precious metals,
particularly for gold,
which has historically had the stronger relationship with real
In addition to the potential headwind from higher real rates,
it's also not clear that either metal is that mispriced. Valuing
commodities is notoriously difficult, as there are no cash
Still, on a relative basis, it's instructive to compare the
prices of certain commodities to each other. For example, three
years ago, silver traded at close to $50 an ounce. At the time,
this was a ratio of 32-to-1 versus gold; meaning gold was trading
at 32x the price of silver, a level that suggested that silver
was very expensive, at least relative to gold. Since then, the
price of silver has fallen by more than half.
Today gold is trading at roughly 63x the cost of silver. While
this is slightly above the forty-year average of 58-to-1, it's
well within the margin of error. This suggests that neither metal
looks particularly cheap or expensive relative to the other.
For investors looking to take a bet, one factor favoring
silver is arguably the economy. Fifty percent of silver demand is
tied to industry. If the economy does improve, silver demand
should rise faster. That said, both silver and gold are
vulnerable to higher real rates, neither looks particularly
mispriced, and investors in silver will need to contend with a
lot of volatility.
While I believe that most investors should always have a small
allocation to precious metals, it's not clear that this is the
time for a dramatic increase in the allocation to either metal.
For investors looking to add to positions or for an incremental
play on global growth, I'd prefer cyclical stocks or
over both silver and gold.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
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