Ratio trading puts gold on top

Punters have found a safe haven in the yellow metal.

Amid worsening euro zone crisis and a parade of falling prices for most commodities, punters have found a safe haven in gold. Market players, who are relatively price sensitive, believe that gold price is set to soar in the near future.

In the past two months, the gold to silver price ratio has increased from 31 to 43 following a sharp fall in silver prices, with gold remaining stable. However, punters believe the ratio is lower compared to the average of 55 and is likely to climb from the current level. A further fall in silver prices and a rise in gold prices could also result in the ratio going up.

 

A Barclay’s commodity analyst said fundamentals are also supporting gold. “Macroeconomic concerns continue to take the sting out of strong oil fundamentals and despite the seasonal weakness in physical demand, a strengthening dollar against the euro (to levels not seen in three weeks), weaker equity markets and heightening concerns over gold prices in Greece remain well supported.”

Ajay Kedia, director, Kedia commodities, said: “The gold-silver ratio remains firm above 43. We have seen the ratio recovering from 39.78 (June 1) due to European debt concerns.

Gold will remain supportive but pressure can be seen on base metals and energy because of growth concerns from China, Japan (after tsunami), Europe & US. Gold-silver ratio might go up to the 45.50 level or even higher. The gold-crude ratio is also expected to go up further.”

Traders said ratio of gold to crude oil prices has also started moving up following the correction of crude oil prices. Traders expect the ratio to go up further if there is an economic slowdown because that would result in weaker crude oil prices but gold would get support. At present, the gold-crude ratio is 13.46 — up by one point in the past couple of days and is expected to move towards its average ratio of 14.68. From this level the ratio may not move up because crude oil prices may not witness a sharp fall. In the last few days, when all commodities have seen a decline in prices, gold has been rock steady.

BETTER RETURNS
	Gold/Silver	Gold/Crude	Silver/Copper
High Ratio	70.88	17.39	167.12
High Ratio Date	Feb 8, ’10	Jun 7, ’10	Apr 28, ’11
Low Ratio	31.71	11.64	70.15
Low Ratio Date	Apr 28, ‘11	Apr 8, ‘11	Feb 18, ’10
Avg Ratio (Jan'10 to Jun '11)	55.54	14.68	96.45
Current Ratio ( 17Jun,11)	43.22	13.46	125.33
Note: Ratios are calculated based on the prices of the commodities & taking uniform weight Commodities used: LME copper, LME Silver, LME Gold, Brent Crude Data Compiled by BS Research Bureau                                     All Figures in ratio (x)