The precious metals exchange-traded fund (ETF) market has been on a roll over the past several months. This is hardly surprising given the meteoric rise of the gold price from $1,050/oz to $1,240/oz thus far this year. Over the same period, silver prices rose from $14/oz to $17.20/oz. These impressive gains have naturally led their ETF counterparts higher, partly due to vastly improved investor sentiment.
However, these funds began to slightly pull back at the end of last week. For instance, the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV) each lost more than 1.5% over the course of Friday’s trading session.
We’ll take a look at the fundamentals underlying these two ETFs below.
The most glaring recent trend for silver prices has been the precipitous drop in the gold-to-silver ratio. Early in the year, gold was far outperforming its precious metal cousin by a wide margin. (It’s hard to keep pace with the kind of gains the gold price was posting, though.) This sent the ratio skyrocketing to an historically high level of 83:1.
Yet, many observers began to notice that imbalance between the two metals. Not only did it become a topic widely reported on, but it also became obvious that silver was lagging behind gold. This is a reversal of what typically happens: silver generally gains (or loses) more than gold does, proportionally, during periods of volatility.
As more and more market participants began to pick up on this trend, they speculated that it wouldn’t last. The gold-to-silver ratio subsequently plunged to about 72:1 as silver caught fire. The argent metal was posting single-day gains north of 4% during recent sessions.
Despite the pullback on Friday, silver remains strong at $17.20 per ounce, not far from its high closing price last week. Appropriately, the iShares Silver Trust (SLV) added 0.6% on Tuesday.
Gold has had a slightly more muted performance of late compared to silver. In addition to sticking to a tight trading range amid a consolidation pattern, gold has seen somewhat offsetting forces that have kept prices subdued. (Consolidation is not uncommon following a significant jump in prices like gold saw in January and February.)
The two opposing influences on gold have been speculation by one group of traders and another group of traders taking profits off the table. One natural consequence of the surge in gold prices to begin the year has been that many rallies in March and April have been cut short by profit-taking. On the other end, speculative bets that the gold price will rise are at their highest in years. The net-long position in COMEX gold futures is bigger than it’s been anytime since February 2012.
Nonetheless, gold seems to have hit a temporary roadblock. Even as long positions piled up on the futures market over the last three weeks, gold prices retreated by about 0.5%. As a result, the SPDR Gold Trust (GLD) ended last week on a sour note, losing 2.3% from last week’s high above $120/share. Since then, the fund has recovered a bit. GLD traded 0.4% higher on Tuesday.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.