Indicator Car
That Gold Silver Ratio Is An Important Signal Of Rising Silver Prices
The last time the gold silver ratio stood below 40:1 was in February 1998, just right after silver had staged a 33% rally in five weeks, whilst gold had gained just 4% over the same period (which commenced at the beginning of the year). The contraction in the ratio over the period was from 48.4:1 to 38.1:1.
This time around, some thirteen years on, the gold Silver Prices ratio is trading at between 39:1 and 40:1 along with a comparable contraction has taken precisely the same length of time. This time however, gold and silver are trading at over $1,440 and $36, whilst back in 1998 they had been at $300 and just over $7.
Now the Silver Prices have bounded up as a result of a continual belief (whether or not right or wrong) in gold’s upward trend on the back of current geopolitical and inflationary worries. Both gold and silver are already in sustained bull markets, whilst in 1998 the change in ratio marked the beginning of a shift in sentiment, albeit one that was buffeted by subsequent external events.
Silver investment can often exceed that of gold for more than just one single reason: a) the history of silver’s higher volatility over gold, prompting professional activity having a view to gearing up on returns; b) silver’s lower unit price, which attracts some smaller-scale traders who want exposure to precious metals because of inflationary worries in particular and who do not necessarily have enough wealth to invest in gold to any meaningful level; c) in the United States particularly, silver has a long-standing investment tradition. This is because of the period when the US dollar was on the gold standard and private people had been prevented from holding gold, so they used silver as a substitute.
At the beginning of 1998, gold was starting to stage a recovery after a long period of uncertainty, portrayed by intermittent announcements of large-scale central bank sales that unsettled market sentiment; this was augmented by increasingly heavy mine hedging and these two fundamental factors, combined with anti-inflationary monetary policy, had kept gold prices under some pressure.
What was different about the beginning of 1998 was the starting formation of the European Monetary Union, which gave the marketplaces a degree of comfort and decreased the expectation of recognized sector sales. (This, of course, was latterly to be stymied by the headline in May 1999 by HM Treasury in the UK of the proposed disposal of up to 40% of UK gold holdings; emotion then changed considerably as a result of the institution of the very first Central Bank Gold Agreement in September 1999). Investors started to return to gold and silver was a natural beneficiary of the changes in sentiment.
Curiously enough, silver manufacturing demand in 1988 was just over 26,000 tonnes; in 2010 it was very close to the same level, suggesting that the market itself is not a lot deeper than it was in the late 1980s. In fact, on the basis of LBMA clearing figures, the December 2010 every day average clearing rate was just below 100 million ounces, less than one-third of the clearing figures for end-1997.
The structure of the demand side has changed with industrial demand from customers fluctuating, but photography, jewelry, and silverware falling considerably. Coin demand from customers, by contrast, continues to be growing steadily.
Continual retail demand has helped the rise in the price of silver in recent months, reflecting the continued recognition at the retail level of the affordability of silver by comparison with gold. This has been particularly marked in the Far East, where silver bullion bars have scarce and commanding high premiums, whilst India and also the Middle East have also been strong buyers.
As a result the ratio has to some extent taken on a life of its own and been bought and sold as an outright entity in the bullion markets. Today at 13-year lows it is not in unknown territory, but is definitely oversold.
While the markets stay bullish about the outlook for gold on the back of continual inflationary and geopolitical fears, silver is most likely to continue to draw in attention. The outright price may make silver unattractive for fresh bull positions, but theoretically driven and momentum trades may yet see costs higher if the political scenario is not resolved having a minimum of further damage. Silver has frequently been the commander between the two precious metals because of its lower unit price and higher volatility; the ratio can consequently be regarded as a comparable leading indicator. In fact it is probably one of the most substantial indicators in terms of precious metals market sentiment and, so, with regards to looking for guidance, the chart should be watched carefully for signs of reversal. Even stabilization could be significant; a bounce may well trigger stops. I recommend you buy silver dollar coins and put them away safely for the time coming soon when you may need them.
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