Analysts: Gold/Silver Ratio May Remain At Elevated Levels

By Paul Ploumis 15 Jul 2015  Last updated at 06:16:49 GMT

(Kitco News) - The gold/silver ratio may remain at elevated levels until there is a pick-up in global economic growth, analysts say.

The ratio measures how many ounces of silver it takes to buy an ounce of gold, with a high number meaning gold’s outperformance, and vice-versa. The ratio currently stands around 75:1. The consultancy Metals Focus said it foresees a range of 70:1 to 76:1 in the coming months.

The ratio traditionally has been around 60:1, said RBC Capital Markets, noting it fell as low as 32 in recent years before climbing to the current level.

“In our view, silver may benefit from a continued recovery in the U.S. economy but absent a pick-up in global economic growth, the ratio may remain at elevated levels,” RBC said. “While gold and silver normally trade in lockstep, with a historical correlation of 0.92, the gold-to-silver

ratio typically spikes or trends higher in periods of economic uncertainty or recession due to investor preference for gold as a safe haven.”

The Canadian bank later added that “we believe an improvement in the global economy would be positive for silver relative to gold.”

Metals Focus does not envision the ratio falling dramatically despite stronger retail demand for U.S. Eagle silver bullion coins lately and also a 26% rise in first-half silver bullion imports into India.

“In spite of the strength in Indian and U.S. retail investor demand, neither appears to have had much impact on prices,” the consultancy said. “While the gold/silver ratio did recover to around 75:1 from its peak of 78:1 last week, this should be viewed in the context of the recovery in industrial commodities in general on signs of stability in the Chinese stock market.”

Metals Focus said the challenge for silver will be “whether a wider group of investors” will return as buyers. In particular, institutional investors appear “less convinced about silver’s immediate upside prospects,” the firm added.

“Given silver’s industrial credentials, the uncertain industrial outlook remains another major drag on investor sentiment,” Metals Focus said. “This in turn reflects several factors, many of which relate to China.

First, the slump in Chinese equities and events in Europe -- in spite of an apparent deal with Greece -- have led to heightened concerns about the prospects for the global economy. Second, the slowdown in China has already affected light-vehicle sales, a key consumer of silver components. Third, should the economic uncertainty in China become protracted, this might undermine the country’s massive program of new photovoltaic capacity….Finally, also in PV, there is the impact of ongoing thrifting in the silver content of PV pastes.”

Courtesy: Kitco News