Precious metals: Industrial demand revival to turn silver into gold

Gold/silver ratio at five-year high indicates the white metal will give better returns when prices rebound

Silver may be the new gold. The reason is prices have fallen sharply compared to gold. As a result, the gold/silver ratio has risen to a five-year high. The ratio shows the ounces of silver you can buy with one ounce of gold. At present it is around 71, previously seen five years ago. A high ratio means silver is undervalued compared to gold and will fall much less versus gold, or when prices increase silver will rise faster.

In three months beginning June, international gold prices have fallen 8.8 per cent to $1211 an ounce while silver has fallen 19 per cent to $17.02 an ounce. The ratio increased from 63 to 71 in just three months.

Gnanasekar Thiagarajan, director, Commtrendz Research, said, "Investors should look at buying gold and silver as technically both are looking weak. But the fall in silver will be less. When these rebound silver will rise faster."

Silver traces gold in precious metals but unlike it a large part of its demand comes from industrial use. It is found in almost every electronic device, including smartphones and tablets. It is a crucial element in manufacturing the photovoltaic cells used in solar panels and automobile components. An expected global economic pickup is good news for silver. So analysts see the fall in silver to be contained. A US-led upswing in global growth is expected to spark commodities' demand.

Research houses saw their targets being touched on Friday night when gold closed below $1,200 per ounce. Now these are busy forecasting the future course. Thiagarajan believes there is still downside left for gold, but for silver the fall may not be much from here. He said, "Investors can buy silver between Rs 38,000 and Rs 36,000 a kg." For gold he believes Rs 24,000 per 10g may be a good buy as internationally it may correct to $1,050 per ounce.

  But others believe investors could soon get an opportunity to put money in gold. Sudheesh Nambiath, senior analyst, precious metals, GFMS Thomson Reuters, said, "Indian investors can look to buy gold at Rs 26,000 per 10g while silver looks good at Rs 37,300 per kg." Gold is already coming near to that. On Saturday, in the Mumbai market, it closed at Rs 26,850 per 10g. Silver closed at Rs 39,250 per kg.

Gold investors globally are in selling mode. US-based SPDR, the largest gold exchange-traded fund, has seen gold holding falling from an all-time high of 1,350 tonnes on December 31, 2012, to a six-year low of 767.5 tonnes in less than two years.

The major downside risk for gold and silver in India is the government cutting import duties. A 0.2 per cent cut could shave Rs 500 per 10g off gold. Also, investors need to track the currency exchange rate.

For Indian investors, in 40 years, gold has given negative returns in five years. This is because the rupee has always depreciated against the dollar.

This has resulted in higher gold prices in rupee terms. In the global market, by data compiled by the BS Research Bureau, gold gave negative returns in 17 of 40 years.