The gold to silver ratio, which indicates the relative strengths of both the metals, is testing three-decade high. At present, the gold to silver ratio is 96.5, not seen since 1991. The ratio rises when silver underperforms gold. Historical data shows that whenever this ratio rises to very high levels, it never sustains and falls.
This ratio suggests how many ounces of silver can be bought with one ounce of gold. In India too, like their global peers, traders use the ratio. When they expect the ratio to rise, they buy gold and sell silver.
Ajay Kedia, director, Kedia Commodities said, “The gold silver ratio is currently at at level of 96.5. It has seen a jump of about 19% in the last six months. Gold prices have also jumped in this period to Rs 44960 and have moderated from there. This shows the market’s clear preference of gold over the silver. Globally, gold demand has risen in the last six months as central banks have been buying more and more gold. Support was also seen due to the US-China trade war, US Middle east geopolitical tensions and the rapid spread of coronavirus. Traders are still buying gold as a safe haven in these uncertain market conditions. Silver, however, has remained stable compared to gold due to poor industrial demand. The ratio can reach 1991 levels of 100.”
So far, traders have been saying that the ratio will not sustain at high levels and silver will start outperforming gold. This is possible if gold falls faster than silver, or, going forward, silver rise faster than gold. However, silver doesn’t look strong at present over weaknesses in base metals. This is important as silver is also used for industrial purpose.
There are reasons why gold can rise further.
Metal Focus, a London-based consultancy, said in its latest report on gold that apart from the spreading virus and the Federal Reserve sharply cutting interest rates, “Impact of political turmoil and geopolitical tensions also proved positive for the metal. Among the various problems, some that stand out include uncertainties ahead of the US presidential election, uncertainties surrounding the Brexit negotiations and ongoing tensions across the Middle East.”
While predicting a further rise for gold, the consultancy said, “We are also sceptical that fiscal/monetary stimuli introduced by policy makers will be sufficient to rescue the global economy. Prior to the virus outbreak, not only had nominal interest rates been kept at historically low levels across key reserve currencies, central banks’ balance sheets have also ballooned since 2008. As a result, despite some near-term market relief, the boost from additional rate cuts and/ or monetary easing on the underlying economy should be limited.”
On the other side, silver price is not showing signs of any noteworthy improvement indicating that the gold silver ratio in the near term will rise further and silver will underperform with respect to gold.
During January and February 2020, combined silver Eagle sales totalled just 4.50 million ounces, compared with 6.18 million ounce over the same period in 2019. This indicates that the sale of silver coins is weak.
A key challenge concerns the trend in the silver price, which was largely range-bound over the first 5-6 weeks of this year. From an investor standpoint, this price performance was quite unattractive, especially in the light of the rally in gold.
To some extent, according to an analyst with a global research firm, “This reflected disillusionment with silver’s price prospects and concerns that it will suffer as global growth concerns deepen.”
Eventually, he sees the silver price recovering with the rise in US demand for silver coins and bars. He expects an upside in the silver price, which in turn will encourage retail buying on two counts. First, institutional investors will move to silver. Second, as positive price expectations emerge, some retail investors may buy into a rising market, with a view to gaining exposure to silver before prices strengthen further. This might become possible only in the second half of the year once the ratio starts to fall.