Silver has soared since mid-March 2020, fueled by renewed industrial demand and investor appetite for alternatives to gold and government bonds. From its low in mid-March, the S&P GSCI Silver was up 65% as of July 17, 2020. The less precious metal, silver, has lagged gold’s recent multi-year increase. The more volatile precious metal has historically overshot moves in gold prices (see Exhibit 1). This can occur before or after a large move in gold, so it does not always occur with a lag. Notice the outsized move of silver from September 2008 to April 2011. Is this time different?

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Over the past 20 years, silver’s monthly correlation to gold was 0.75—quite high, but not perfect. There is an important reason why silver isn’t perfectly correlated to gold. Industrial use is much higher for silver, accounting for more than 50% of demand. Investment demand for silver has risen over the past three years from a 10-year low, but it still only accounts for about half of the industrial demand. Typical industrial uses for silver include solar panels, automotive components, and medical devices. Although gradual, there has been a steady decline in the industrial use of silver over the past 10 years.

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As of July 17, 2020, the S&P GSCI Silver was up 6.1% for the month, twice as strong as the S&P GSCI Gold’s return. Is this the start of a higher beta move for the less precious metal after a few years of directionless prices? It is too early to tell, and with the global pandemic still raging in many countries, the future is tenuous. The S&P GSCI Industrial Metals was also higher this month, in line with the move in silver, so this recent move could be explained by the economic optimism boosting certain metals on the back of promising COVID-19 vaccine trials.

If the last major disruptive event of the past 15 years is any indication, a bullish environment for gold typically opens the door to bullish price action for silver. Market participants diversified some of their gold holdings to silver in previous scenarios, and such flows tended to cause outsized moves in the much smaller silver market. It is important for market participants to be aware that the silver market is smaller and typically more volatile than the gold market.

S&P DJI calculates many variations of indices tracking the silver market, including inverse and leveraged indices such as the S&P GSCI Silver 2X Leveraged, which was up 12.1% for the month as of July 17, 2020, and back in positive territory YTD. Looking to commodities to diversify an investment portfolio could provide a silver lining in the second half of 2020.