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A Gold Silver Ratio Is An Important Sign Of Expanding Silver Costs
The last time the gold silver ratio stood below 40:1 was in February 1998, just right after silver had staged a 33% rally in five weeks, while gold had gained just 4% over the same period (which commenced at the beginning of the year). The contraction in 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 along with a comparable contraction has taken exactly 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.
Now the Silver Prices have jumped up as a result of a continual belief (whether right or wrong) in gold's upside on the back of prevailing geopolitical and inflationary worries. Both gold and silver are already in sustained bull markets, while in 1998 the transformation in ratio marked the beginning of a shift in sentiment, even though one that was battered 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 with a view to gathering steam on returns; b) silver's lower unit cost, which attracts some smaller-scale traders who want being exposed to precious metals because of inflationary worries in particular and who don't necessarily have sufficient wealth to invest in gold to any meaningful level; c) in 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 individuals were prevented from holding gold, so they used silver as a substitute.
At the beginning of 1998, gold was starting to stage a recovery following a long period of uncertainty, portrayed by intermittent reports of large-scale central bank sales that unsettled market sentiment; this was augmented by increasingly heavy mine hedging as well as these two fundamental factors, combined with anti-inflationary monetary policy, had kept gold prices under certain pressure.
What was different about the beginning of 1998 was the starting formation of the European Monetary Union, which gave the markets a degree of comfort and decreased the expectation of recognized sector sales. (This, of course, was latterly to be stymied by the announcement in May 1999 by HM Treasury in the UK of the proposed disposal of up to 40% of UK gold holdings; emotion then changed substantially as a result of the institution of the very first Central Bank Gold Agreement in September 1999). Investors started to return to gold and silver was a natural beneficiary of the changes in sentiment.
Interestingly enough, silver manufacturing demand in 1988 was just over 26,000 tonnes; in 2010 it was very close to the same level, suggesting that the market itself is not a lot deeper than it was in the late 1980s. Actually, on the basis of LBMA clearing figures, the December 2010 every day average clearing rate was just below 100 million ounces, much less than one-third of the clearing figures 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, continues to be growing steadily.
Continual retail demand has made it easier for the rise in the price of silver in recent months, highlighting the continued recognition at the retail level of the value of silver by comparison with gold. This has been particularly marked in the Far East, where silver bullion bars have scarce as well as commanding high premiums, while India and also the Middle East have also been strong buyers.
Consequently the ratio has to some degree taken on a life of its own and been traded as an outright entity in the bullion markets. Today at 13-year lows it is not in unknown territory, but is definitely oversold.
While the markets stay bullish about the outlook for gold on the back of continual inflationary as well as geopolitical fears, silver is most likely to continue to attract attention. The outright cost might make silver unattractive for fresh bull positions, but theoretically driven and momentum trades might yet see costs higher if the political situation is not resolved with a minimum of further trauma. Silver has frequently been the commander between the two precious metals because of its lower unit cost and higher volatility; the ratio can therefore be regarded as a comparable leading indicator. Actually it is most likely one of the most significant indicators in terms of precious metals market sentiment and, so, with regards to looking for guidance, the chart ought to be watched closely for signs of reversal. Actually stabilization would be significant; a bounce may 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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