Where's gold headed? Just ask silver.September 30, 2010: 1:09 PM ET
For a peek into the future of the price of gold, look no further than its precious metal sibling, silver. The poor man's gold has been on the same streak as the yellow metal, but recent moves have some of the most bullish players wondering if precious metals might be headed toward the end phase of their rally -- a point where prices might not get much higher.
Gold futures for December delivery closed Wednesday at $1,310.30 an ounce on a weaker U.S. dollar and expectations that officials will pump more money into the sluggish economy.
But while silver futures are still much cheaper closing at $21.95 an ounce, it has outperformed gold on this recent run. The price of silver this year has jumped 30%, while gold has climbed about 19%. And at one point on Wednesday, silver reached its highest level since October 1980 at about $22 an ounce. Historically, when silver catches gold or even surpasses its rate of growth, it's a sign we've arrived near the end of the rally.
Unlike gold, which is typically used as a hedge against inflation or economic uncertainties, silver is generally exchanged for its practical uses. It's found in everything from iPods to dental fillings. But as history has shown, silver becomes increasingly viewed as an alternative to gold when there isn't much certainty in the economy. And many investors these days, as Fortune's Colin Barr points out, have lost faith that U.S. lawmakers will decide on pressing issues surrounding jobs, deficits and taxes.
With silver's rise, it seems virtually everyone is bullish on precious metals -- and that's typically when reversals take place, according to commodities traders. Also, the fact that gold and silver miners have yet to see record prices translate into profits has helped raise red flags to some investors.
"Caution is the word of the day," says Patrik Sharma, managing director of Atyant Capital, a hedge fund focused on gold. Despite the rise in silver, Sharma thinks prices for gold will continue to rise over the next 10 years.
Gold has been on an upward trend since 2000, climbing 353% driven partly by a generally weakening dollar. Its rise surged steadily in 2008 as the financial crisis played out.
Today, one of the immediate factors adding to the rise in gold and silver are concerns over steps the Federal Reserve says it is prepared to take to revive the economy by injecting more money into the financial system. This essentially lowers the value of the U.S. dollar and possibly stokes inflation.
The Fed's action is just one factor influencing the rise and fall of gold. But if confirmation is needed, look to silver, which these days look less and less like the poor man's gold.