Commodity Trade Mantra

Time for Silver to Outperform Gold, Ratio Near Historical Peaks

Silver Seen Beating Gold as Ratio Rises to Near Historical Peaks

Silver Seen Beating Gold as Ratio Rises to Near Historical Peaks

Gold price buys about 78 ounces of silver, most since August.

Ratio has only been above that level five times since 1996.

It’s time for silver to outperform gold, if history is any guide.

With gold trading near a two-month high, its price buys 78 ounces of silver, near the most since August. In the past two decades, the gold to silver ratio has only been above that level on about five occasions, and never for more than a three months.

Gold pauses after rising sharply in recent sessions, but it may be a shortlived break. “We have had guys booking profits today” after the metal spiked above US$1,110 an ounce, says Alex Thorndike, a Sydney-based precious metals dealer at MKS. “But with the share market off and the yuan trading lower, the uncertainty is drawing people back into gold” in places such as Shanghai and Tokyo, he says. Turmoil in Chinese markets could trigger higher-than-usual demand for the precious metal heading into the lunar new year, already a popular time for gold buying in Asia, says Thorndike.

Source: WSJ

Gold has fared better this week as global market turmoil and geopolitical tension in the Middle East and Asia prompted investors to seek a haven. Silver has lagged because industrial uses account for half of its demand, compared with about 10 percent for gold. History shows gold hasn’t been able to better silver for long during a crisis: while the ratio surged over two months in 2008, the cheaper metal then outperformed over the following year.

Ratio climbed above 78
Ratio climbed above 78

“People have been looking to gold for a safe haven, and that is what you will expect at this stage,” said Grant Sporre, an analyst at Deutsche Bank AG in London. “But pretty soon they’ll start looking at the relative-value trades, and that’s when you’ll see silver perform.”

Gold is up 3.6 percent so far this week at $1,099.47 an ounce in London, while silver has added 1.7 percent to $14.05 an ounce. Since the early 1970s, the ratio has averaged about 56, according to data compiled by Bloomberg. For the measure to decline, silver would need to climb more or fall less than gold.

When the ratio peaked at almost 80 in August, silver rallied 14 percent in the following two months. Gold added about 5 percent in the period.

“We’re definitely at or about long-term highs for the ratio, and that has proved very significant in the past,” Adrian Ash, head of research at BullionVault, an online trading service, said by phone from London.

Source: Bloomberg

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