Gold’s breakout to new all-time nominal highs is making headlines. On Friday, the price settled at just under $2,200/oz, after gaining almost $100/oz for the week.
Silver actually outperformed gold on a percentage basis. The white metal gained $1.17/oz, or 5%, as compared to gold’s 4.5% gain.
The difference is that silver is stuck in the middle of the range where it has traded for the past four years. It is roughly $5/oz below its 2020 high and $25 below its all-time high.
Silver is historically cheap versus gold.
Historically, the two metals have been tightly correlated.
The difference, in recent years, is that silver has generally underperformed gold and has fallen behind in the current bull market.
Will the lag in silver persist?
Does the price action say something about real-world supply and demand?
Not really. Silver and gold prices are set in the futures market. The hedge fund managers, bullion bankers, and other big players in the silver futures market generally aren’t trading silver with the intent to take physical possession and most of the decisions they make are short-term.
Traders don’t seem to care much about how little actual silver is backing all of the paper they trade.
This crowd doesn't decide to buy and hold based on concerns about perpetual trillion-dollar deficits, the rising prospects of war, the surging cost of silver production, or any of the myriad other sound reasons to buy silver.
In fact, many would rather sell a silver contract to someone who does care about those things, and then punish them for it by driving the price down. For the “powers that be” in the futures market, silver is just another trading vehicle.
Long-term bullion investors, on the other hand, view silver like they always have. They buy physical silver as an inflation hedge and as a store of value – just like gold.
Silver inventories have been falling as demand has outstripped production for the past three years.
The silver price may be lagging behind the gold price in the futures market, but it would be foolish to assume that implies some sort of permanent divergence between the two metals. Most of the firms trading futures don’t care about gold supply and demand either.
The electronic markets appear increasingly unhinged from reality.
For long-term holders of gold and silver, nothing has changed. Both metals make sense to own given the times we are living in.
Silver looks cheap relative to gold, and retail silver premiums have come way down. Now is not the time to get frustrated with or fooled by silver’s lagging price. Odds are, the "poor man's gold" will catch up over time.
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