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What can explain gold's silver syndrome and silver's gold syndrome?

13 Dec 2012

By Rakesh Neelakandan
These are weird times...

Fiscal cliff, Eurozone crisis, China slowdown, Middle East show down, Emerging Market doldrums...there seem to be no dearth for negative news, one would say.

But what can explain gold's silver syndrome and silver's gold syndrome? It all started on November 28 when gold unexpectedly crashed on the Comex by around $26 dollar. Explanations vary. But since then gold has been undergoing turbulent times. It is as if gold is eclipsed by some sort of a volatility curse. Silver, since then has been volatile occasionally, but not to the extent that one may expect it to be.

Movement in Gold has been very volatile in the last 10-15 days even as silver is still trading range-bound. Upside movement in gold was much sharper than in silver from last month and technically as silver is in a consolidation phase, breakout above the level can make it much more bullish than gold. One may get the feel that silver is almost behaving like erstwhile (?) gold and vice-versa. So what can account for this phenomenon?

If gold is behaving more like silver then it is better to seek more information about silver's past behavior in markets.

One should admit that silver is scarce than gold. (Pure play silver mines are rare). This coupled with its affordability when compared to gold—one can buy 50 times silver for same price as that of gold-- has helped the commodity to remain in the spotlight.

Though gold may not be as scarce than silver in statistical terms, it could still be if demand outstrips supply by a huge measure as the effect remains the same.

The third quarter of 2012 may have witnessed relatively subdued demand for gold due to dips in the purchase of bars and coins but the ETF holdings rose in a big way. 

It has to be noted that the demand did not came down per se but was rather partially offset by purchases in terms of gold ETFs. When you invest in ETFs, you save the headache of securely storing some gold; this may account for the diversion of funds to gold ETFs.

This means that effective demand for gold remained more or less the same. No wonder, gold behaved like silver.

But what can account for silver's gold syndrome? Gold maintained gold's status because of its safe haven appeal. A safe haven is when investors would flock to a commodity as an ultimate hedge. When gold became too volatile it is possible that another safe haven was sought and found in silver! This may have lent some stability to the white metal.

Value-wise, gold would continue to maintain its high pedestal status in the coming decades; but times are not far away when silver too joins the monopoly that gold enjoys on an exclusive basis. I do not mean that silver would one day reach $1700 levels; it is impossible. What I mean is, silver would one day start behaving like gold especially in terms of constant positive percentage return! (rakesh@commodityonline.com)

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