The following is a summary of an article that was taken from Market Force Analysis’s website where they did a simple linear regression comparing gold and silver for the past 7 years. The study has definitely confirmed what most traders have known for these past few years…that gold and silver were heavily correlated in these past 7 years, but the data also brings up suspicion that this relationship between gold and silver is actually heavily algorithmic due to the high r-squared of > 0.91 for the past 3 yrs and an r-squared of 0.96 for 2003-2008…almost perfect correlation for two metals that have different functionality and market uses. It’s a heavily programmed trade that does not correlate the fundamental pricing of the commodity itself, as both metals are heavily “suppressed” by the industry’s heavy algorithmic trading schemes. The regression below displays the cross-plot between silver and gold. The black line is from 2003-2008 and the green line is from 2008-2010.
The current trend that we are seeing in silver might be a first sign of de-leveraging (well, actually de-correlating) from gold, and might finally make for a better trading opportunity than gold.
Read the article here.