Compare price movement of precious metals before investing: Analysts

Gold-silver ratio can give direction whether the latter will rally or not

Whenever gold rallies, other precious metals – silver and platinum – follow the trend. Since the beginning of the calendar year, domestic gold prices are up 21 per cent and silver prices have jumped 23 per cent. More recently, the rally in silver has been more pronounced. Gold and silver prices in the past three months are up 17 per cent and 27 per cent respectively.

 Analysts believe that comparing the price movement of one precious metal with another can give a fair idea of which metal to buy and sell. They use parameters such as gold-silver ratio, gold-platinum ratio and silver-platinum ratio to see how price movement in one metal will affect the other. “The current gold-silver ratio suggests that silver prices will go up further from the current levels,” says Ajay Kedia, director, Kedia Commodities.

The most commonly used ratio is gold to silver. It shows how much silver it would take to buy gold. If the gold-silver ratio is higher than the historical average (62), it may mean silver is undervalued. If it's low, it may mean gold is undervalued. According to Kedia, this year the gold-silver ratio made a high of 91.5 on June 28, which indicated that silver would rally. Since then, gold has gained 12.5 per cent, and silver is up 27.5 per cent. 

The ratio is now down to 80.6, which is still on the higher side when compared to the historical average as well as the average in the past five years. It means, either gold may fall or silver may rise further. Many analysts are suggesting that silver prices may see a rally as gold may remain stable or rise further due to looming uncertainties and especially because global central banks are cutting rates.

 

The ratios do tell whether the other precious metals are undervalued compared to gold, but one can’t rely on them entirely. “These ratios are only indicators. They are relevant only when other conditions are also favourable,” says Gnanasekar Thiagarajan, co-founder and chief executive officer, Commtrendz Research. Favourable conditions mean that there should be fundamental reasons for gold to rally further the way it has in the past few months. When the price of gold rallies, use these ratios to see if other metals are under-priced.

Analysts also point out that in the last few years, the gold-silver ratio has remained on the higher side compared to the historical average. “Only when the average went above 90 did silver prices start catching up,” says Thiagarajan. At present, when an investor is looking at the ratio, he needs to keep in mind that other precious metals would be considered undervalued compared to gold only when the average is higher than 75-80.

It is also easier to invest in gold through instruments such as exchange-traded funds, digital gold and sovereign gold bonds. For silver, an investor has limited options such as buying in the physical form. You can also now buy and sell digital silver on Augmont’s website. “An individual can buy silver for as low as Rs 1. After accumulating 10 grams or more, he can either take physical delivery or sell it back on the platform,” says Sachin Kothari, director, Augmont. The selling price would, however, be lower by up to 5 per cent.