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Guest Commentary: 3 Reasons Silver Has Underperformed Gold During May

Guest Commentary: 3 Reasons Silver Has Underperformed Gold During May

2011-05-16 15:55:00
Lior Cohen, Energy Analyst for Trading NRG,
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3 Reasons Silver Has Underperformed Gold During May

During March and April silver has outperformed gold price by a landslide, and yet during May (so far) it seems that the tables have turned and gold price is outperforming silver price. Don't get me wrong, both metals have declined during May so far, but silver fell very precipitately compared to gold.

The chart below shows how gold declined by nearly four percent during May, while silver price fell by nearly 24%.

Guest_Commentary_3_Reasons_Silver_Has_Underperformed_Gold_During_May_body_Gold_prices_forecast__silver_price_outlook_2011_MAY_15.png, Guest Commentary: 3 Reasons Silver Has Underperformed Gold During May

Let's examine the three main reasons for the sudden change in the dynamics between gold and silver prices:

1. Gold beats silver: one of the prime reasons that gold more then doubled in the past three years was because of its appeal for hedgers and traders against the decline in US dollar and inflation concerns. Silver is well known to be highly correlated with gold as seen in the chart below. But in any case, gold was usually the prime precious metal that led the charge and looked upon to hedge, and silver seem to fly on the coattails of gold prices' meteoric like rise. As gold fell during May so did silver came tumbling down even more so;

Guest_Commentary_3_Reasons_Silver_Has_Underperformed_Gold_During_May_body_Correlation_of_Silver_and_Gold_Prices__Dec_2010-_MAY_15_2011.png, Guest Commentary: 3 Reasons Silver Has Underperformed Gold During May

2. Silver is at a lower price compared to gold; thus, the former has a much more volatile nature than gold price has; as a result, just as gold price didn't increase at the same percent level as silver price did during March and April, so did the recent falls also affected silver price very sharply compared to gold (the reasons for the falls of both metals are explained herein). The chart below shows that the ratio of gold to silver was during December 2010 and January 2011 around the 46 to 50 mark, but since then the ratio fell very sharply all the way down to 32 at the end of April.

Guest_Commentary_3_Reasons_Silver_Has_Underperformed_Gold_During_May_body_Gold_prices_forecast__silver_price_outlook_ratio_2011_MAY_15.png, Guest Commentary: 3 Reasons Silver Has Underperformed Gold During May

3. The margins on silver rose: this is probably the most significant effect that occurs at the beginning of May: the CME Group raised the margin requirements on silver trading. This raise was done twice in a week's span during the first week of May. The minimum amount needed to deposit for trading silver in CME inclined to 16,200$ per contract, an increase of 11.6% from the pervious amount needed. This change immediately downgraded silver as seen during May.

As May will progress if there won't be any new breaking news that will affect silver and gold price we should likely to see the recent correction to remain and keep current ratio of gold to silver at its new range of 42 to 46, the range back in February 2011.

By: Lior Cohen, Energy Analyst for Trading NRG

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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