Will Gold Continue Its Dominance Over Silver ETFs?

The weakness in the global financial markets has helped precious metals, like gold and silver, to recover their sheen in 2016. Sluggish growth in China since the beginning of the year and the global oil market turbulence has lifted safe-haven demand.

The jump in gold and silver prices was also supported by plunging interest rates on a global scale. With the Fed not expected to raise interest rates in the near term, the rally is expected to continue (read: Ride on Gold Rally with Best ETFs and Stocks of 2016).

While gold has gained 18% and 11% year to date and in the past one month, respectively, silver has risen 10% so far this year and just 4.4% in February.
 
Will the Trend Continue?
 
Gold and silver prices have exhibited strong correlation in the past 10 years. In fact, some investors regard silver as a leveraged play on gold. Per a regression analysis based on FactSet data, silver prices move 1.4 times the increase in gold prices on an average. In other words, if gold rises by 1% in a particular session, silver is expected to gain 1.45%.
 
However, this year prices have gone the other way round as evident from the year-to-date and monthly figures. The outperformance of gold can be due to the fact that silver is widely used for industrial purposes. Weak manufacturing activities across the globe, particularly in China, have hurt the demand for the white metal, affecting its price.  
 
How to Play?                                                       
 
But history they say repeats itself and the appreciation of gold prices over silver is not likely to be sustainable over the long run. This is because conditions in the U.S. market are slowly improving and industrial demand for silver is expected to get a boost from stepped-up domestic economic activity. Additionally, silver supply could contract given the dearth in deposits faced by the silver miners, forcing producers to look for fresh projects.
 
Meanwhile, investors returned to risk-on trade sentiment in the recent week, which could affect the demand for gold bullion. Investors could play the market by going long on silver and short on gold.
                                             
Below, we have highlighted some of the silver and inverse gold ETFs. Investors should note that since these inverse products when combined with leverage are very volatile, these are suitable only for traders and those with a high-risk tolerance and short-term outlook. Additionally, the daily rebalancing – when combined with leverage – may force these products to deviate significantly from the expected long-term performance figures (see: all Inverse Commodity ETFs here).

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