In the long run, gold looks good; in the near term, silver may go up further.
The price ratio of gold to silver plummeted below 40 on Monday. While this is much below the average range of 55-60, trade circles say the ratio may fall even further. The price ratio indicates how much ounce of silver can be purchased with an ounce of gold.
In London on Monday, the market gold traded at an all-time high of $1,441 an ounce, while silver was at $36.5. The ratio of gold to silver was at 39.5.
The fall is being attributed to the fast rise of silver prices in the recent past as compared to gold, although the atmosphere for bullion has been bullish.
Since the beginning of the Egypt crisis a month ago, silver prices have gone up by 20 per cent, while gold has increased only eight per cent. The trend has continued for the last three years, as the increase in silver prices compared to gold has been steep.
According to Ajay Kedia, director, Kedia Commodities, “This is because silver has industrial demand component and when economies do well, demand of silver for industrial use also goes up, which doesn’t happen for gold.”
Precisely due to this, gold to silver price ratio was above 80 in the last quarter of 2008 when the financial crisis related impact on the markets was at its peak. Then gold was rising, while silver was falling.
Now, “Chances of gold prices rising faster are much higher in the coming days, although fundamentals are positive for bullion in general because the long-term average of gold-silver prices is 55-60. This is possible theoretically, even if silver prices fall but that is unlikely as investment demand is also good in silver,” said Jayant Manglik, president, Religare commodities.
This is for the long-term, however, Kedia says, “In the near-term, the ratio may fall to 36, as internationally there are reports that some hedge funds are said to be covering short positions as the stop-loss they have kept have surpassed. The impacts may remain till shorts are covered.”
Manglik has an advice for investors. He says, “Silver is a high beta commodity and hence returns could be very high and so are the risks.”
Historically, the ratio had dipped to just 17 in early 1980 when hunt brothers had taken a speculative position taking silver prices to nearly $50 an ounce. Silver went up from $11 in September 1979 to $49.45 on 18 January 1980. However, later the regulator took stringent measures and silver prices crashed in the following months. Gold silver ratio has seen level of 100 in 1991.
