Posts Tagged ‘Gold to Silver Ratio’
By Garry White, and Rowena Mason
6:02PM BST 27 Mar 2011
Certainly, the fundamentals are sound. Declining mine production has resulted in a tight supply as demand continues to rise.
Investors are still keen on silver because of currency and geopolitical concerns. Holdings in the iShares Silver Trust, the largest silver exchange-traded fund (ETF) in the world, increased by 179 tonnes to 11,140 tonnes in the week to March 24. Gold holdings in ETFs fell over the same time period.
“The psychologically important mark of $40 a troy ounce is meanwhile within a reachable proximity,” Commerzbank said on examining the ETF figures.
The fact that investors are keen on silver means that ETFs take supply out of the market, which can mean price rises become a self-fulfilling prophecy.
Silver is also an industrial metal, so demand for it is rising as the global economy recovers. Although it is no longer used much in photography, as the industry switches to digital applications, its use in electronics sectors, especially in semiconductor production, is increasing. There are also new applications for the metal emerging, such as silver oxide batteries.
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Both gold and silver hit significant highs on Thursday last week. Gold futures jumped to an all-time high of $1,448.60 following the turmoil in Libya and further protests around the Middle East. Silver prices reached $38.18 on the same day, the highest in 31 years. Silver prices jumped almost 6pc last week after more than doubling over the last year.
The main argument that silver bulls use relates to the gold/silver ratio, which is simply the price of gold divided by the price of silver in the spot market.
When gold and silver were used as currency, it was decided that 16 ounces of silver had the same degree of purchasing power as one ounce of gold. The silver/gold ratio therefore stood at 16:1.The last time that the ratio reached 16:1 was in the 1980 precious metals spike following the energy crisis.
At the start of October last year, when this column last talked about silver, the gold/silver ratio stood at just under 60. Today the ratio stands at 38.3, having fallen sharply over the last month. At the start of February the ratio was at 49.5. There is definitely a trend that silver is increasing in value relative to gold.
The fact the ratio is below 40 is itself a reason for caution. The long-term average is about 40, so today’s ratio could be about right. Most analysts did not expect the price to rise so sharply this year, so the price could be ahead of itself – especially if there is a quick resolution to the current turmoil in the Arab world.
There are other downside risks, too. Any strengthening of the dollar is likely to cause a dip in commodity prices, as they are priced in the US currency. There has been some brighter economic data from across the Atlantic of late causing some to ask the Federal Reserve to stop its second bout of quantitative easing early.
“The economy is looking pretty good,” James Bullard, president of the Federal Reserve Bank of St Louis said on Saturday. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the programme or to stop a little bit short.”
Printing money is expected to weaken the dollar over the long term, so any early cessation could cause the US currency to rise. As commodities are priced in dollars, any strengthening makes them more expensive in other currencies causing a weakening of demand.
After such a bull run, any correction in silver prices could come hard and fast, so it may be wise to wait and see if it appears, especially since silver equities now appear to be very richly rated.
However, the US debt is enormous and, at some point, policy makers may decide that inflating away the debt is their only option, prompting the dollar to devalue. This means silver will remain attractive over the long term. But now does not look like a good time to buy.
Read the entire article HERE.