Gold/Silver Ratio Hits 25-Year High; Silver Underperforms

November 13, 2018

New York (Nov 13)  The gold/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 dragged down by pessimism about base metals.

“The silver price has been very weak in recent days – in both absolute and relative terms....The gold/silver ratio has risen to 86, its highest level in 25 years,” said a research note from analysts at Commerzbank.

The ratio measures how many ounces of silver it takes to buy an ounce of gold. When the number is rising, this reflects silver is underperforming relative to gold. Based on the Comex December futures contracts for gold and silver, the ratio stood at 85.88 around 10 a.m. EST.

Bart Melek, head of commodity strategy with TD Securities, pointed out that silver historically tends to be more volatile than gold. Gold has been on the defensive over the last week, giving back its gains from October so silver fell more disproportionately.

Comex December silver on Tuesday bottomed at $13.92, the contract’s weakest level since 2016. December gold fell as far as $1,201.40, a level not seen since Oct. 11.

“Volatility is the short-term story,” Melek said in explaining the rise in the gold-silver ratio. “Silver is underperforming because it is an industrial and precious metal, or monetary asset.”

Analysts have blamed the weakness in precious metals on a resurgence of U.S. dollar strength, with the spot dollar index hitting its highest level since the middle of 2017. The greenback was boosted last week when the Federal Open Market Committee 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 budget deficit to gross domestic product than allowed by European Union rules.

However, observers said, silver’s slide has also been impacted by spillover weakness in industrial base metals such as copper. Comex December copper has lost more than 60 cents a pound since its summer peak. Historically, slightly more than half of silver demand has been for industrial use.

“The ratio between silver and gold continues to widen, with silver falling to the cheapest in a quarter century as slowing economic growth clouds the outlook for metals with industrial uses,” said commodities brokerage SP Angel. “Spot silver tumbled 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 markets supported safe haven investing in October.”

Further, Melek explained, weakness in emerging-market currencies hurts silver demand since this makes the metal more expensive in local currencies. This is another factor hurting demand in China, which uses much silver in the manufacturing of electronics goods, Melek explained.

“We’ve been seeing that in India as well,” Melek added.

Analysts look for silver to fare better down the road, with some suggesting the metal might be oversold already.

“Silver is facing headwind from two different directions at once -- firstly from gold, and secondly from base metals,” Commerzbank said. “We believe the price slide is excessive nonetheless. In our opinion, the current price level provides an attractive opportunity to hedge against rising prices.”

TDS sees the picture improving for silver and other precious metals, although this may not happen until 2019. For starters, industrial demand is seen improving, Melek said.

“We see it unlikely the Fed will continue rate hikes, which should help precious metals generally,” he added.


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