Gold vs. Silver: Profit Opportunities in the Widening Spread

Key Points

• The spread between silver and gold is widening again to a technical level that might trigger a relative value trade for the banks and funds.
• Investors can confirm this trigger by looking at recent institutional capital flows into silver and out of gold and a divergence in performance.
• Wall Street analysts confirm this potential rotation by adding upside to a silver mining stock name.

Some of the world’s best hedge funds and trading desks on Wall Street employ a simple strategy, one that is focused on the concept of relative valuation between two assets. In today’s market, the basic materials sector has shown a potential price widening between two widely followed precious metals. Gold has once again outpaced silver by a wide margin, and the last time the two got this far away, investors walked away with a handsome profit.

Considering the price action in these precious metals compared to the price action in other asset classes like bonds and even cryptocurrencies like Bitcoin can give investors a better understanding of what is happening underneath the hood of the United States stock market. Of course, more reasoning needs to be considered before investors take on this relative valuation trade.

These reasons will become clearer in a bit, but before investors dig into the details, all they need to know is that the profit potential comes from the widening spreads between the SPDR Gold Shares NYSEARCA: GLD fund, which attempts to track the spot price of gold as closely as possible. On the other hand, there is the iShares Silver Trust NYSEARCA: SLV, which acts as a hedge for investors to keep next to their potential play in gold’s next path.

Why Gold Prices Could Be Up for More Movement This Week

There are many drivers behind the price of gold, but one of the main factors is the market’s psychology and expectations for inflation in the coming quarters. After rising to new all-time highs this year, gold faced a new headwind that slowed its momentum around the $2,700 price area, but that alone is no answer to this trade.

Bitcoin, now considered the digital gold of today, is also connected to the market psychology around inflation expectations. Considering that the cryptocurrency failed to keep its momentum and reach the widely expected $100,000 target, most retail investors are shooting for this time.

That slowdown may signal that inflation pressures might be coming off as the main driver, especially as bond yields started to withdraw to close the week, showing investors and traders more evidence to consider inflation themes leaving the equation.

If this trend continues into the coming weeks, then there are reasons to start taking gold profits off the table, if not outright betting against the precious metal. In this case, however, investors have silver to look into as a hedge in case trends reverse.

Gold vs. Silver: Spread Analysis and Predictions for What Comes Next

Knowing that the setup is there for gold to potentially pause or decline, the high correlations (up to 88% statistically) between gold and silver mean two things for investors to consider today. The first is that silver needs to catch up to gold significantly, as the ETFs have diverged by over 10% in the past month to favor gold’s price action.

The second is that the widening in price action, reflected in the relationship between gold and silver prices, indicates a clear ceiling of resistance. If history is any guide, buying gold while shorting or liquidating silver could favor traders bold enough to take this position.

More than technical and statistical reasoning, investors can now lean on the recent institutional buying flows into this silver fund, particularly those at Toronto Dominion Bank, which boosted their holdings for silver as much as 18.6% as of November 2024, bringing their net investments up to $64.9 million today.

At the same time, the bank also sold 16.7% of its holdings in the gold shares fund during the same week it bought silver. These relative value strategies are common for investment banks and hedge funds, so it makes absolute sense to see the bank shift between the two precious metals.

Investors can look into other gauges in the stock market for confirmation in this trade, and that comes from the mining stocks industry. Specifically, Hecla Mining NYSE: HL commands a much greater upside potential over peers in the mining industry, all because of its direct exposure to silver mining.

Analysts at TD Securities have reiterated their Buy rating on Hecla Mining stock, this time also placing a price target of up to $8 a share. To prove their new views right, Hecla Mining would need to rally by as much as 45.5% from where it trades today, not to mention a new high for the year.

Is it a coincidence that the same bank that bought the silver fund also boosts the valuations for a silver mining stock? Unlikely, this trade is accumulating more and more bullish evidence that investors will almost not be able to miss today.