4 reasons silver outperformed gold in 2011 – 29 March

In the past couple of months we have experienced a sharp rise in silver prices, mainly during the middle of March, around the time the tsunami attack on Japan, while gold prices didn’t do much. What is the reason for this difference in performances between precious metals?

There are numerous articles that try to explain the rally of silver prices, especially during March seeing that they have risen by more than seven percent from the beginning of the month to date.

Some analysts present compelling points that might have been among the factors that drove silver prices up, such as the rise in the uncertainty in the Middle East and the turmoil in Japan; however these explanations all lack one key aspect and that is gold price’s stagnation during March.

One of the main characteristics of silver price is that it’s strongly correlated with gold price. This characteristic, however isn’t something to rely on and fluctuates: during January 2011 their daily percent changes correlation was 0.905, and in February 2011 their correlation was 0.64.

The leading paradigm was that gold prices dragged silver prices up, especially if you consider that gold was the prime soft metal traders looked to invest in as the economic recession began in 2008.

During March, however gold price declined by nearly 1%, while silver spot price rose by 7.5%. Despite the difference in trends of these commodities’ prices, as seen in the chart below, the correlation between gold and silver prices was still high at 0.885.


Gold and Silver prices normalized 2011

Furthermore, as seen in the price ratio of gold to silver chart below, there is a decline in this ratio since the end of January. This means that silver price rose at a higher rate than gold price did during that period.


Gold and Silver prices ratio 2011

So what exactly happened here? Why this shift in which silver outperformed gold?


There are several hypotheses that might explain this occurrence:

  • The strong correlation between silver and gold: traders know of this relation between silver and gold, so they feel they can receive similar results by buying silver over gold at lower prices;
  • Silver is cheaper than gold: This of course was always true,  but now gold prices are at a very high level – the highest level in over a decade, which makes silver much more compelling to consider as an investment;
  • On top of that there are growing concerns that the recent tsunami in Japan might affect the financial markets and depreciate not only the Yen but also the US dollar (seeing that BOJ holds hoards of US dollar and Japan might start to spread them around to finance the recent rebuild of the country);
  • Australian dollar affect: there was also a rally for the Australian dollar in the past couple of months. This fact coincides with the rally of silver prices as their average price rose by 8.5% in February and 15.1% in March. The AUD has a stronger correlation with silver than with gold (see graph below). I speculate that these two factors might indicate a relation between silver and AUD, especially since Australia is a leading country in exporting metals including silver.

Correlations Gold & Silver Prices and major currencies Dec 2010- March 2011

These factors might have played the tipping points that drove hot and fast speculation funds towards silver. Will we continue to see a silver outperforming gold in the near future? This is a difficult question I will try to answer in a near future post.



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