Gold/Silver Ratio Hits 25-Year High; Silver Underperforms
(Kitco News) - Thegold/silver ratio has risen to its highest level in roughly a quarter century,with silver suffering from both weakness in precious metals lately but also draggeddown by pessimism about base metals.
“Thesilver price has been very weak in recent days - in both absolute and relativeterms....The gold/silver ratio has risen to 86, its highest level in 25 years,”said a research note from analysts at Commerzbank.
Theratio measures how many ounces of silver it takes to buy an ounce of gold. Whenthe number is rising, this reflects silver is underperforming relative to gold.Based on the Comex December futures contracts for gold and silver, the ratiostood at 85.88 around 10 a.m. EST.
BartMelek, head of commodity strategy with TD Securities, pointed out that silverhistorically tends to be more volatile than gold. Gold has been on thedefensive over the last week, giving back its gains from October so silver fellmore disproportionately.
Comex Decembersilver on Tuesday bottomed at $13.92, the contract’s weakest levelsince 2016. December gold fell as far as $1,201.40, a level not seen since Oct.11.
“Volatilityis the short-term story,” Melek said in explaining the rise in the gold-silverratio. “Silver is underperforming because it is an industrial and preciousmetal, or monetary asset.”
Analystshave blamed the weakness in precious metals on a resurgence of U.S. dollarstrength, with the spot dollar index hitting its highest level since the middleof 2017. The greenback was boosted last week when the Federal Open MarketCommittee signaled that it would continue increasing U.S. interest rates.Further, the euro has been undercut against the greenback by European politics,in particular with Italian officials wanting a higher ratio of the budgetdeficit to gross domestic product than allowed by European Union rules.
However,observers said, silver’s slide has also been impacted by spillover weakness inindustrial base metals such as copper. Comex December copper has lost more than60 cents a pound since its summer peak. Historically, slightly more than halfof silver demand has been for industrial use.
“Theratio between silver and gold continues to widen, with silver falling to thecheapest in a quarter century as slowing economic growth clouds the outlook formetals with industrial uses,” said commodities brokerage SP Angel. “Spot silvertumbled 17% this year, close to an almost three-year low, while gold’s[year-to-date] fall records less than 8% after turmoil in world equity marketssupported safe haven investing in October.”
Further,Melek explained, weakness in emerging-market currencies hurts silver demandsince this makes the metal more expensive in local currencies. This is anotherfactor hurting demand in China, which uses much silver in the manufacturing ofelectronics goods, Melek explained.
“We’vebeen seeing that in India as well,” Melek added.
Analystslook for silver to fare better down the road, with some suggesting the metalmight be oversold already.
“Silveris facing headwind from two different directions at once -- firstly from gold,and secondly from base metals,” Commerzbank said. “We believe the price slideis excessive nonetheless. In our opinion, the current price level provides anattractive opportunity to hedge against rising prices.”
TDSsees the picture improving for silver and other precious metals, although thismay not happen until 2019. For starters, industrial demand is seen improving,Melek said.
“Wesee it unlikely the Fed will continue rate hikes, which should help preciousmetals generally,” he added.
By Allen SykoraFor Kitco News
Follow @AllenSykora
asykora@kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  |