Where Do Silver Prices Go From Here?

There’s been a strange disconnect among the prices of gold, platinum, palladium and silver recently. Let’s run through some price history among the precious metals, and see if we can figure out what’s going on with silver prices. It’s been lagging gold on this latest run.
If we look at a chart that compares the iShares Silver Trust (NYSE: SLV), SPDR Gold Shares (NYSE: GLD) and TFS Physical White Metal Basket Shares (NYSE: WITE), we see that the metals all have moved in relative lock-step for the past five years. The charts look identical.
precious metals chartHowever, there is a major difference between gold and the white metals. Gold maintained, and continues to maintain, more intrinsic value than the others. With a starting point of March 2011, the white metals fell below the break-even line in September of 2011, and have never revisited it. They’ve been in a downtrend every since, with prices slowly eroding over time.
Gold, however, took much longer to give up its gains, and still never gave up nearly as much as the others did. The white metals fell 54% (platinum and palladium) and silver fell 60%. Yet gold only fell 26% at its worst.
So far this year, gold is up 16%, silver is up 10% and the white metals are up 4%.

Psychological Factors for Silver and Gold

When it comes to precious metals, the prices will always depend on supply and demand, as we might expect. However, supply and demand bifurcates into two different categories. One involves demand for the actual practical uses of the metals, and the other involves demand for them as safe havens during period of market instability.
Unsurprisingly, demand for gold shot up during the first part of the year during the market’s turmoil. The inference seems to be that, for whatever reason, ever since the end of the financial crisis, the psychological safety factor for gold appears to outweigh that of the white metals. When we consider that the financial crisis was a true panic, and the stock market fell 55%, it is not unusual that primary safe havens like gold would trigger interest in secondary havens, like silver.
You could go back and look at financial articles published during the crisis, and you’ll see lots of articles with the headline, “Gold is great! Don’t forget about silver!” In the worst of times, money will overflow in the bucket of one hard asset into the bucket of others beneath it.
This time, however, the panic isn’t as palpable, so gold has seen most of the benefit.

A Way to Invest in Silver

Silver, however, has also had physical demand issues. Silver is used in some solar applications. There’s been a steady rise in solar installation, but that demand fell in 2012, and has flattened out. Silver also cannot compete with gold when it comes to jewelry fabrication.
Gold is the go-to metal for most jewelry makers. Silver doesn’t even come close. Gold also has far more industrial applications. It’s also the preferred asset for governments and central banks.
Might silver make a stronger move? I think it’ll be driven more by psychological demand, so if you’re thinking about it, I would actually buy the Central Fund of Canada (NYSE: CEF). It holds physical gold and silver in a 2-to-1 ratio. So if silver starts to rise along with gold, but then starts to fall, the gold position will hedge the silver decline.

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