From the end of July to August 25, the price of silver appreciated by 19%. During that same timeframe, the price of gold recorded gains of 15.1%. However, all the attention is going to gold’s performance, while silver is barely being mentioned even though it did the heavy lifting for precious metals.
The first question is: Why did silver record bigger gains than gold did? The answer lies in the size of the two markets. The gold market is several times larger than that for silver, so a force that barely shifts gold prices triggers a much bigger effect on the silver market.
Think of it this way: If you place a 200-horsepower engine in a semi-truck and another 200-horsepower engine in a sedan, the sedan is likely to travel a lot faster than the semi-truck when the drivers floor the accelerator pedal because the different engines are tugging different weights.
To show how large the gains of silver were in comparison to gold, one needs to look at the gold-silver ratio. At the start of the month, it stood at 70.1 and it has dropped to less than 68. This means that at the beginning of the month, one needed to exchange 70.1 ounces of silver to get an ounce of gold. That number has now reduced.
The dropping gold-silver ratio clearly illustrates how fast the price of silver has risen in comparison to the price of gold. So, isn’t it strange that silver was barely noticed when it made such huge gains in comparison to gold?
Why does gold get all the attention? Gold is purely a monetary metal while silver is both a monetary metal and an industrial metal. It is therefore possible for the price of these metals to move in different directions if the drivers affect them differently. Gold attracts all the attention because its price shows what investors think about the current or future state of the economy.
Entities like Numa Numa Resources Inc. that are linked to both metals know that silver’s smaller market is a double-edged sword. The price of the metal can rise significantly, as it did in August this year, and it can also drop spectacularly when a market force causes precious metal prices to come under pressure. Investors need to be aware of this two-sided behavior of silver relative to gold and size their portfolios accordingly.
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