Gold to silver ratio tests three-decade high, eyes 1991 level of 100

This ratio suggests how many ounces of silver can be bought with one ounce of gold

The gold-to-silver ratio, which indicates the relative strength of the two metals, is testing the three-decade-high level of 100, seen in February 1991. Currently, the ratio is at 96.5. 

The ratio rises when silver underperforms gold. In the past, whenever the ratio has increased to a very high level, it has never sustained and fallen. The ratio shows how many ounces of silver can be bought with one ounce of gold. 

Traders in India, like their global peers, trade on the basis of this ratio. If they expect the ratio to rise, they buy gold and sell silver.

“The gold-silver ratio is currently at 96.5. It has seen a jump of about 19 per cent in the past six months. Gold prices have also jumped in this period to Rs 44,960 (per 10 gm) and moderated thereafter. This shows the market’s clear preference for gold,” Ajay Kedia, director, Kedia Commodities, said. 

“Globally, gold demand has been rising in the past six months as central banks have been buying gold. Gold prices also got support from 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 remained stable compared to gold as industrial demand is poor. The gold-silver ratio can reach the 1991 levels of 100,” Kedia said.

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 if silver rises faster than gold. However, they are now refraining from commenting as silver still doesn’t look strong following weaknesses in base metals. This is important as over 55 per cent of the silver demand comes from industry.

There are reasons for gold to rise further or outperform silver.

Metal Focus, a London-based consultancy, said in its latest report on gold that apart from the spreading virus causing damage in newer areas and the Federal Reserve sharply cutting interest rates, “the 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 as well as Brexit negotiations, and ongoing tensions across the Middle East”.

           

While projecting further rise for gold, the consultancy said, “We are also sceptical that fiscal/monetary stimuli introduced by policymakers 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 prices are not showing signs of any noteworthy improvement, indicating that the gold-silver ratio in the near term will rise further and silver will underperform gold.
During January and February 2020, the combined silver Eagle sales (coins) totalled just 4.50 million ounces, compared with 6.18 million ounces over the same period in 2019. This indicates that 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 calendar year. From an investor standpoint, this price performance was quite unattractive, especially in the light of 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 expects silver prices to recover when US silver coin and bar demand improved. This, in turn, should lead to an upside break out in silver prices, which in turn will encourage retail buying on two counts. First, some of the gold buying of 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 could be possible only in second half of CY2020 from when the ratio is expected to start falling.