High Gold-to-Silver Ratio: a Worrying Sign or a Bargain for Silver?

Gold and Silver Bullion
High Gold-to-Silver Ratio: a Worrying Sign or a Bargain for Silver?

The discrepancy between average gold and silver prices has reached its highest in two years.

The gold price is 27% up on its 10-year average as the precious metal is now valued 82 times higher than silver. Some investors say it is a negative economic indicator while others think it’s a good buying opportunity.

A higher gold-to-silver ratio might point to a coming downturn in the market as investors usually turn to gold and ditch silver when they think markets might turn rocky and global growth slow down.

Silver futures have fallen 3.1% this year, compared to a 3.3% gain in gold. That’s after last year’s bullion rise of 14% against silver’s 7% advance.

Last time the gold-to-silver ratio stayed above 80 was in early 2016, when a possible Chinese economic downtrend worried markets and in 2008 during the financial crisis.

The recent increase in the ratio comes as investors have turned bearish on silver while inventories in warehouses have risen, a sign of potential over supply. The amount of silver stored in depositories approved by CME Group Inc. jumped 16% to 251 million troy ounces from the start of August to the end of February.

Supply and demand play a big part in silver price movement. Nearly 60% of demand for silver comes from industrial uses, according to the Silver Institute report released in January. Worldwide silver demand for photovoltaic applications, particularly in solar panels, reached an estimated 92 million ounces in 2017and it’s expected to continue to grow this year.

Consequently, some analysts point out that the high gold-to-silver price ratio might be suggesting a bargain in silver.

“It has little to do with market sentiment, I would be in the reversion camp of this being a buying opportunity for silver.”
Nathan Thooft, senior managing director of global asset allocation at Manulife Asset Management

However, others say that as silver is regarded as an industrial component rather than a store of value, subdued economic outlook and tariffs imposed on products using silver as a component could halt the demand growth.

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