Precious Metal ETF's Seeing Interesting Action

Matt Thalman - Contributor - ETFs

Since the start of January the price of Gold and Silver have risen nicely as both metals are seen as a hedge against inflation and purchasing power over time. With continued low interest rates in the U.S., the announcement of QE in the Eurozone, debt issues in Greece, and the Swiss playing games with their own currency, many investors have begun looking for safe havens.

With Gold and Silver being the most trusted safe havens by many, and gold and silver ETF's making it easy for investors to quickly get in and out of owning the metals, we are seeing some interesting actions in two ETF's that actually own bullion itself. The SPDR Gold Shares (GLD) ETF owns actual gold bullion while the iShares Silver Trust (SLV) ETF owns actual silver bullion. The fact that these ETF's own actual bullion is key because their underlying assets are based on the price the metals are trading for at any given time, not futures contracts, miners or any other way to play the metals.

As it would be expected, with what is happening around the world, these ETF's have risen substantially year-to-date; iShares Silver Trust is up 9.83% while SPDR Gold Shares has climbed 8.69%. These move come while the S&P 500 has actually lost 3.1% year-to-date.

But here is what is interesting about these moves; net flows, or the amount of cash moving in or out of these funds are wildly different. iShares Silver Trust ETF has seen $175 million flow out of the fund since January 1 while the SPDR Gold ETF has seen $1.93 billion flow into the fund, according to data. So why is this happening?

While on the surface both gold and silver are commodities and hedges against currency fluctuations and inflation, the fact of the matter is, they are both not the same. Besides being used in jewelry, gold has no other use other than as a hedge against inflation. On the other hand, silver is not only used in jewelry, but it is used in electronics and other real world applications. This means the demand for silver is higher when economic activity around the world is increasing and it is lower when growth around the world begins to slow down.

The demand for a safe haven being caused by the QE program in the Eurozone and the debt issues in Greece also highlight the fact that economic activity in Europe is not great. On top of the weakness in Europe, our economic activity even here in the U.S. is still on slippery ground and probably the biggest wild card in all is China, which recently reported GDP at its slowest growth rate since 1990.

Over the past six months commodities nearly across the board have fallen as Chinese demand has slowed. Iron ore, coal, copper, and oil are all well off their highs as China's sensational demand for raw materials has slowed recently. Over the past three decades China's GDP growth has averaged 10%, but with 2014 GDP coming in at 7.4% and economist expecting 2015 to hit 6.8% and 2016 to fall in around 6.5%, it is unlikely the price of commodities are going to get a boost from China anytime soon.

Final Thoughts

Investors simply looking for a safe haven need to understand that gold and silver, while similar in a lot of ways, have different factors affecting their prices. Gold is a truer safe haven against inflation, while silver will likely give you a better return if world economies are improving but inflation is still a concern.

Matt Thalman Contributor - ETFs

Disclosure: This contributor has no positions in any stocks mentioned in this article at the time it was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.