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What drives the price of gold? Can silver be its alternative?

Promoted by ETF Securities.

For many, the word gold conjures up a sense of the exotic and beautiful items of immense value, or perhaps a secure vault overflowing with gold bars, coins or ingots. For investors however, with increasing world volatility, gold is a staple in their portfolios as a safe haven asset. Here we take a look at the factors influencing the gold price and how investors can use gold as a hedge for both geopolitical risks and to protect against inflation.


Trade idea – ETFS Physical Gold (GOLD)/ ETFS Physical Silver (ETPMAG)

  • In the short term, the gold price tends to be more affected by investors’ views on wider market sentiment, such as unexpected geopolitical risks.
  • For long investment horizons, the gold price moves largely in-line with inflation.
  • Can silver be an alternative investment to gold? The relationship between their prices may give you some insights.


Factors influencing the gold price

Unlike most commodities, fluctuations in the gold price are driven less by physical demand and supply but more by investors’ views on wider market sentiment, such as unexpected geopolitical risks. The gold price may rise when sentiment in the market is worsening, as gold can be an effective portfolio diversifier, historically uncorrelated to other assets. Additionally, when the world feels a little more threatening, unsettled and dangerous, gold is often viewed as the ‘go-to’ safe haven.

Source: Bloomberg, June 2017
Historical performance is not an indication of future performance and any investments may go down in value

Gold against inflation

Gold is also widely viewed as a tool against inflation. Historically, the gold price tends to appreciate when inflation and interest rates are on the rise. The chart below shows how the gold price moves largely in-line with the inflation (CPI) of the United States.

Source: Bloomberg, September 2018

To hedge or not to hedge?

Gold can be subject to price variations on different exchanges due to currency fluctuations against the US Dollar (gold is universally priced in USD). These movements can be considerable (e.g. Sterling’s decline post-Brexit) and can have a big impact on overall returns. Whether an investor hedges their gold exposure to their local currency should depend on the investor’s views on the long-term performance of that currency versus USD, as well as, for diversification purposes, to consider their currency’s correlation with the USD. For instance, Australians may use unhedged gold as it better diversifies their Australian Dollar (AUD) exposure, or because they have a view that AUD is going to weaken against USD.

Gold/silver relationship

Silver is another precious metal that investors commonly use to hedge event risks and inflation risks, though the silver price is usually more volatile than the gold price. Statistically, it has a beta of 1.4 versus the gold price over the last 10-years, with the magnitude of its price movements much higher than its golden counterpart. The gold/silver ratio is now standing at 83, considerably high compared to an average of 64 over the last 10 years, which could imply that silver is relatively undervalued.


Product information

ETFS Physical Gold Download Factsheet
ETFS Physical Silver Download Factsheet


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This document is communicated by ETFS Management (AUS) Limited (Australian Financial Services Licence Number 466778) (“ETFS”). This document may not be reproduced, distributed or published by any recipient for any purpose. Under no circumstances is this document to be used or considered as an offer to sell, or a solicitation of an offer to buy, any securities, investments or other financial instruments and any investments should only be made on the basis of the relevant product disclosure statement which should be considered by any potential investor including any risks identified therein.

This document does not take into account your personal needs and financial circumstances. You should seek independent financial, legal, tax and other relevant advice having regard to your particular circumstances. Although we use reasonable efforts to obtain reliable, comprehensive information, we make no representation and give no warranty that it is accurate or complete.

Investments in any product issued by ETFS are subject to investment risk, including possible delays in repayment and loss of income and principal invested. Neither ETFS, ETFS Capital Limited nor any other member of the ETFS Capital Group guarantees the performance of any products issued by ETFS or the repayment of capital or any particular rate of return therefrom.

The value or return of an investment will fluctuate and investor may lose some or all of their investment. Past performance is not an indication of future performance.

What drives the price of gold? Can silver be its alternative?
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Anonymous - This is silly. Most countries would think 3 per cent was fantastically low. Further, who measures how much economic activity is being destroyed by.......
Anonymous - What a load of rot! What is he comparing the detriment to, and how much does the GFC effects factor into his farcical calculations? ....
Anonymous - In other words, sack advisers and cut costs. It's the financial version of #me too movement.....
Anonymous - If that's after tax pay then I'm screwed.....