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A Gold Silver Ratio Is An Important Sign Of Increasing Silver Costs
The last time the gold silver ratio stood below 40:1 was in February 1998, just after silver had staged a 33% rally in five weeks, while gold had gained just 4% over the same period (which commenced at the start of the year). The contraction within 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 and a comparable contraction has taken precisely the same length of time. This time nevertheless, gold and silver are trading at over $1,440 and $36, while back in 1998 they were at $300 and just over $7.
This time the Silver Prices have jumped up as a result of a sustained belief (whether right or wrong) in gold's upward trend on the back of current geopolitical and inflationary worries. Both equally gold and silver are already in sustained bull markets, while in 1998 the transformation in ratio marked the start of a shift in sentiment, even though 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 expert activity having a view to gearing up on returns; b) silver's lower unit price, which draws in some smaller-scale traders who want exposure to precious metals because of inflationary worries in particular and who don't necessarily have enough wealth to invest in gold to any meaningful level; c) within the United States in particular, 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 were prevented from holding gold, so they used silver as a substitute.
At the start of 1998, gold was starting to stage a recovery following a long period of uncertainty, characterized by intermittent reports of large-scale central bank sales that unsettled marketplace sentiment; this was augmented by increasingly heavy mine hedging and these two fundamental elements, combined with anti-inflationary monetary policy, had kept gold prices under certain pressure.
What was unique about the start of 1998 was the starting formation of the European Monetary Union, which gave the marketplaces a degree of comfort and reduced the expectation of recognized sector sales. (This, obviously, 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; sentiment then changed substantially as a result of the institution of the first Central Bank Gold Agreement in September 1999). Investors began to return to gold and silver was a natural beneficiary of the changes in sentiment.
Interestingly enough, silver fabrication demand in 1988 was just over 26,000 tonnes; in 2010 it was very close to the same level, suggesting that the marketplace itself is not a lot deeper than it was within the late 1980s. Actually, on the basis of LBMA clearing figures, the December 2010 every day average clearing pace was just below 100 million ounces, much less than one-third of the clearing numbers for end-1997.
The framework of the demand side has transformed with industrial demand from customers fluctuating, but photography, jewelry, and silverware falling substantially. Coin demand from customers, by contrast, has been growing steadily.
Continual retail demand has made it easier for the rise in the price of silver in recent months, reflecting the continued recognition at the retail level of the value of silver by comparison with gold. This has been especially marked within the Far East, where silver bullion bars have scarce and commanding high premiums, while India and also the Middle East have also been powerful 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 within the bullion markets. Now at 13-year lows it is not in unknown territory, but is definitely oversold.
While the markets remain bullish about the prospect for gold on the back of sustained inflationary and geopolitical fears, silver is likely to continue to attract attention. The outright price might make silver unappealing for fresh bull positions, but technically driven and momentum trades might 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 therefore be regarded as a comparable leading indicator. Actually it is most likely one of probably the most significant indicators in terms of precious metals marketplace sentiment and, so, when it comes to looking for guidance, the chart ought to be watched carefully for signs of reversal. Even stabilization would be significant; a bounce might well bring about 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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