Written by: Daniel Fisher, director of Physical Gold
It’s sometimes difficult to really get under the skin of a financial market unless you hear what’s really going on from the horse’s mouth. Certainly the precious metals market has baffled many in recent months due to its apparent underperformance despite the woes with the Greek debt crisis.
Gold and silver prices are affected by a variety of technical elements but sentiment and mood play just a large a role. That’s why, as a precious metals dealer, we like to study what our customers are actually doing and saying to get a feel for any themes in the market.
One such trend which is gaining momentum is customers switching part or all of their physical gold holding into physical silver. We’ve seen several cases each month since January this year, with numbers increasing around 10 per cent each month.
HOW DOES TIMING AND MARKET CYCLE AFFECT INVESTOR CHOICE?
It’s important to note that our customer base varies greatly. Not only do our customers vary demographically
but also in the amount of metals they hold and more significantly when they bought. The glue that holds them all together as a group is their common interest in protecting their wealth and reducing their overall market risk through precious metals.
For those who have held gold for several years, their holding still represents a healthy profit despite its price correction over the past two years. Many have been disappointed that, despite the deepening Greek crisis, gold is in fact down 8 per cent in sterling terms this year.
This frustration has motivated them to lock in their profits and move some of their holding sideways into silver. Similarly, some of those who first invested into gold within the past two years have run scared and decided to cut losses by switching over their holding to silver.
WHY ARE THEY DOING THIS AND WHAT INSIGHT DOES IT PROVIDE?
When you analyse the price performance of the two metals since the beginning of 2014, it becomes clear that silver is extremely undervalued versus gold. In sterling terms, gold has fallen a relatively modest 4.7 per cent while silver has plummeted 21.3 per cent in the same period.
Clearly this suggests that silver would present the greater opportunity for upside from the current point, and this seems to be the major motivation in clients switching. Any analyst would probably agree that silver represents the better value currently of the two.
As a physical precious metal, silver still provides the safe haven status without any counterparty risk that gold does, the very factors which appealed to clients in the first place. While silver is a less developed market with slightly bigger risks, many are switching half of their holding from gold as they are now more comfortable in the physical metals market.
We always recommend newcomers to start with gold before venturing down the list of metals, which explains why we’re now seeing some of our longer-term holders switching.
HEDGE THE HEDGE!
Another clear motivation to move some gold into silver is the desire to further diversify your holding. While gold does provide a hedge to traditional paper markets, holding both gold and silver, further diversifies your precious metals holding. There’s the feeling that silver can perform well when global economies are good and bad as (unlike gold) it has so many industrial uses.
So, if the economic backdrop improves, demand should increase for technology which uses silver – pushing up prices in the metal. In other words, if investors feel that some economies are picking up while others may still flounder, owning both metals will cover all bases.
Finally it’s also worth noting that a previous stumbling block to owning physical silver in the UK has been overcome at Physical Gold. Namely that while investment gold is VAT exempt in the UK, investment silver is not. So until recently clients wishing to hold actual silver bars or coins would be 20 per cent down before even starting.
We’ve offered a solution to our clients for the couple of years to own silver bars in an allocated and segregated vault offshore, thus avoiding the VAT hurdle. I think this has helped with many of our clients in choosing to now hold both metals.