Silver Mounted
This Gold Silver Ratio Is An Essential Signal Of Climbing Silver Costs
The previous 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, whilst gold had gained just 4% over the exact 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 and a similar contraction has taken precisely the exact same length of time. This time however, gold and silver are trading at over $1,440 and $36, whilst back in 1998 they were at $300 and just over $7.
This time the Silver Prices have bounded up as a result of a sustained belief (whether right or wrong) in gold's upward trend on the back of current geopolitical and inflationary worries. Both gold and silver are already in sustained bull markets, whilst in 1998 the change in ratio marked the beginning of a shift in sentiment, albeit one that was buffeted 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 professional activity having a view to gearing up on returns; b) silver's lower unit cost, which attracts some smaller-scale traders who want being exposed to precious metals due to inflationary worries in particular and who do not necessarily have enough 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 due to the period when the US dollar was on the gold standard and private people were prevented from keeping gold, so they used silver as a substitute.
At the beginning of 1998, gold was starting to stage a recovery following a lengthy 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 and these two fundamental elements, combined with anti-inflationary fiscal policy, had kept gold prices under certain pressure.
What was unique about the beginning of 1998 was the starting formation of the European Monetary Union, which gave the markets a degree of comfort and reduced 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; sentiment then changed considerably 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.
Curiously enough, silver fabrication demand in 1988 was just over 26,000 tonnes; in 2010 it was extremely close to the exact same level, suggesting that the market itself is not much deeper than it was in the late 1980s. Actually, on the basis of LBMA clearing figures, the December 2010 daily average clearing rate was just below 100 million ounces, less than one-third of the clearing figures for end-1997.
The structure of the demand side has transformed with industrial demand from customers fluctuating, but photography, jewelry, and silverware falling considerably. Coin demand from customers, by contrast, has been growing steadily.
Continual retail demand has made it easier for the rise in the price of silver in recent months, highlighting the continued awareness 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 and commanding high premiums, whilst India and the Middle East have also been strong buyers.
As a result the ratio has to some extent 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 certainly oversold.
Whilst the markets remain bullish about the prospect for gold on the back of sustained inflationary and geopolitical fears, silver is likely to continue to attract attention. The outright cost might make silver unappealing for fresh bull positions, but theoretically driven and momentum trades might yet see prices higher if the political scenario is not resolved having a minimum of further damage. Silver has frequently been the commander between the two precious metals due to its lower unit cost and higher volatility; the ratio can consequently be regarded as a similar leading indicator. Actually it is most likely one of the most substantial 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 change. Even 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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