Is silver performing better than gold? If so, why is silver turning out to be a better investment proposition than gold? In its latest Metals Monthly, VM Group research for Fortis Bank Nederland says that the gold/silver ratio has moved sharply in silver’s favor.

Here is what Fortis Bank Nederland says on silver investment:

"Silver has performed strongly recently, especially in comparison with gold. Fixing at $15.57/oz on 15 February, the price traded in a narrow range up to 24 February ($15.76/oz) before racing higher, to $17.47/oz by 10 March. Subsequently it has succumbed to profit taking on a weaker gold price, but as of 18 March was still at $17.49/oz, 10% higher than a month earlier.

As gold was essentially flat over this period, the gold/silver ratio has moved sharply in silver’s favor, reaching a low of 63.91 on 12 March, compared with over 70 in mid-February. However, it fell back on 15/16 March, as gold recovered.

What was behind silver’s gains? Base metal prices performed strongly in this period, with a 9% gain for the LME index of base metal prices between 15 February and 15 March, the same as silver’s price gain.

One reason for both is the devastating earthquake that hit Chile, the world’s fourth largest silver producer (and largest copper producer), on 27 February, with another (termed an ‘aftershock’ in some reports) following hard on its heels on 11 March.

ETF demand has been very weak. The holdings of the physical ETFs so far in 2010 have shown a slight fall of 241,249 oz (7.5t). In 2009 by contrast 47.7 Moz had been purchased at this stage (1,485t), and in 2008 20.9 Moz (649t).

Short-term outlook on Silver

The Chilean earthquake emphasizes the role of the unexpected in determining metal prices. Nevertheless, silver’s latest gains in price only bring the gold/silver ratio back to where it was in early January, before silver suffered a bout of price weakness.

Whether the price can maintain these gains will depend on the extent of the damage done to Chile’s silver mines, and how quickly they can return to full production, plus the extent to which fragile investor sentiment remains bullish.

We expect some pullback over the next month, especially with respect to gold. Short-term London fix: $16.50/oz-$17.75/oz."

Courtesy: VM Group research for Fortis Bank Nederland - Metals Monthly March 2010

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