Silver may give less returns, switch to gold: Experts

A sudden rise in the price of silver has ensured the grey precious metal now offers little opportunity for investors, say market experts. The reason: The price spike has pulled its ratio with gold below the normal level of 60. In relation to silver, gold offers an enormous opportunity, until the ratio further rises to 70.

Investors in precious metals always look at the ratio between silver and gold, as both are considered safe-haven investment options and offer the same hedging opportunity. Silver’s ratio with gold, which has reached below 60 for the first time after October last year, hints the investment is skewed towards gold. As a consequence, gold has further upside potential.

With silver hovering at $21.9 an oz and gold at $1,311 an oz, the ratio is 59.86. The logic behind the ratio digit could be related to the silver reserve. When gold trades at $500 an ounce and silver at $5 an ounce, traders refer to a gold-silver ratio of 100. Today, the ratio floats, as gold and silver are valued daily by market forces, but this wasn’t always the case. The ratio has been set at different times in history and in different places by governments seeking monetary stability.

Historically, an all-time high ratio of 100 in the early 1990s took silver from $3 to $8, an almost 200 per cent increase. Similarly, in 2003, when the ratio was near 80, prices jumped 100 per cent from $4 to $8. In 2009, the ratio came close to 79 and silver moved from $10 to $16, a rise of 60 per cent. Until the first fortnight of June, the ratio came close to 71 and silver rose to the current level of $21.9. On all these occasions, silver gradually cooled in proportion to gold. This time, the fundamentals are favourable towards gold.

“Silver has already overheated. Now, investment opportunities are more in favour of gold,” said Tarang Bhanushali, an analyst with India Infoline Ltd. Silver has been regarded as a precious metal due to its historic connection with currencies and its lingering jewellery market. However, demand from jewellery, coins and medals comprises less than 30 per cent of the aggregate demand; this is 80 per cent in case of the big brother, gold.

Against a negligible 0.03 per cent rise in silver demand at 889 tonnes in 2009, fabrication demand recorded a decline of 11.9 per cent to 729.8 million oz due to the global financial crisis and reflected a sharp drop in industrial offtake to its lowest level since 2003.

The metal’s investment demand showed a sharp increase of 184 per cent to 136.9 million oz in the same year. With the recent spark in gold prices the result of a weak dollar, the yellow metal has recorded a 19.5 per cent gain so far this year, while silver has gained 29.7 per cent.

Participants at the London Bullion Markets Association conference on Wednesday forecast gold prices would rise to $1,450 an oz next year. An increase to this extent will mark a 10.6 per cent rise from the current level. Participants also said silver prices would rise to $24 an oz by next year.