Gold-silver ratio hovers near multi-decade high! What’s next?

• Gold-silver ratio moves out of the historical band during the last few years
• Last five years average on the ratio stood ~74 against a reading of ~60-65 during the last 2 to 3 decades
• Economic development globally supports moderate bullishness for the yellow metal along with the ratio in the near-term

Gold and silver are two of the largest tracked, traded and favoured commodities among the precious metals space globally. Gold is an investment-led commodity and is considered as an inflation hedge and garners a lot of attention particularly during periods of economic weakening and political uncertainty. Gold’s price performance depends upon various factors, including internal demand-supply trend, global economic and monetary policy changes, major currency movements, inflation and investment trend in the major asset classes across the world. Silver, on the other hand, largely follow the former’s movement during up and down cycles in terms of prices performance. The price movements in the greyish-white metal, however, are generally swift and mercurial in nature as it takes a cue from investment space as well as industrial sector demand, which drives a majority of the consumption for the commodity globally.

Other than the pure-play, gold and silver commodity price performance, traders and investors also closely watch the gold/silver cross i.e. denomination derived from dividing the gold price by silver. If we look at the data for the last decade, gold/silver cross or the gold-silver ratio stood at ~62.5 (gold and silver spot, USD/Troy Oz), while 30-year average reading based on the monthly data also stood near similar levels. However, things have changed lately, wherein the last five years average number for the ratio stood around ~74 levels (average price for gold and silver during last five years, weekly rate ~$1,245 and $16.7, respectively). Historically, traders have been utilising movements in the ratio over the short to medium-term to decide on the trend for the two commodities in isolation or also against each other, while generating returns out of the same.

Moreover, as per the above chart, during the last 2 to 3 decades, any major movement in the ratio below 50 as seen during 1998, 1999 and 2006 among others can be considered as a buying opportunity for the ratio i.e. buy gold/sell silver as lower ratio indirectly depicts that gold has become less valuable as equated to silver. Similarly, a significantly higher movement towards the 80 mark has been followed with significant resistance from traders and investors alike, wherein they buy silver/sell gold at these higher levels to take advantage of the exceedingly bearish sentiment towards silver as compared to the yellow metal. The same broadly followed during 1996, 2003, 2008 and 2016. Yet again, as we stand in 2019, we are into a similar domain with the gold/silver ratio hovering significantly above the 80 mark. In fact, the gold/silver ratio has maintained above 80 mark for more than a year now with the data depicting no signs of retreating back as against the scenario historically (the latest reading near 83.5).

Will the two commodities and their cross rates follow the historical trend, or we are going to see a change in the same?

Televisory believe that the long-term movement in the two commodities is likely to follow a historically cyclical trend, wherein the ratio should fall, however, it might take some time before the reversal takes place. While the core demand-supply numbers do not provide much support for the yellow metal, though gold is one such commodity wherein more than the internal demand-supply statistics, developments and cues on the macroeconomy, political and currency front have a higher weightage on the price movement. If we look at the recent developments in the global economy, cues related to housing, construction, manufacturing, new orders and inflation among others do not look favourable across key developed and developing economies like the US, the major European economies, China, Japan and other BRIC countries. Distinctly, while the US-China trade tension seems to be subsiding, it is yet to abate completely. These aspects support investment in gold as an alternative hedge, while is also one of the critical rationales behind the late 2018 rally in the commodity from lows of around $1,200 per ounce (Comex/Spot Gold) during Aug. 2018. Silver on the other hand, too followed a near similar pattern on pricing in the last few months of 2018, though gains were less as it faces twin problems regarding high mined supply along with demand mismatch as industrial consumption is anticipated to move lower if major economies around the world underperform.

On that note, it is likely that the gold-silver ratio may continue to stay near alleviated levels for the next few quarters, much higher than its long-term average. Televisory is of the view that the volatility in the precious metals complex might heighten over the medium-term as investors digest the economic data, developments in the trade spat between the two of the world’s largest economies, currency movements (especially the US dollar and the Euro) and cues related to the Brexit. Cautiousness on economic developments as also cemented by the World Bank and the IMF during their separate commentary over the state of the global economy in 2019 and 2020 is expected to provide moderate bullishness to the yellow metal. The economic cues are also seen weighing on the US Fed to go slow against the tightening process, while central banks in the problematic economies like the ECB, BoE and BOJ, PBoC might have to again look back at factors which support amelioration in the overall economic activity along with fiscal push if needed. Hence, looking at the current state, the global economy is in the midst of a negative and a positive phase, wherein critical macro-economic data suggests weakness, however, at the same time this is not too negative to ring alarm bells. Running down these factors on the gold-silver ratio, the trend in the near-term seems positively ranged, while any significant up-move from here reckon the outlook of the world economy over the next few quarters. On the contrary, the ratio needs to be tracked closely as it should start retreating at the first sign of economic easing and normalisation globally. Therefore, till that confirmation, it is better to avoid any major short build-up at this stage.