Silver prices went up sharply on Wednesday, following a rally in metals, led by aluminum and nickel. After the American sanctions on Russian oligarchs and a large aluminium mining company on April 5, metal prices were on fire and silver also outperformed gold during the period, albeit slower than base metals.
Traders in the gold to silver price ratios have turned to silver; many physical market players have also built positions in silver. On the Multi Commodity Exchange, a bearish position in the gold:silver ratio is created by buying silver and selling gold in the proportion of the prevailing ratio at the time of betting.
After imposition of sanctions, silver's price in the Mumbai market went up by almost six per cent to close on Thursday at Rs 40,160 a kg -- the rally since Wednesday was 2.3 per cent. Standard gold went up 1.5 per cent during the period but was almost stable from Wednesday, up only 0.1 per cent to close at Rs 31,290 per 10g.
The ratio of the price of gold to silver, indicating how many ounces of the latter can be bought with one ounce of gold, was steady around 80 for quite some time. Historically, the ratio has reversed from this level. Ratio traders have bet on it reaching 75 in the enar future, from 78 on Thursday. Sudheesh Nambiath, senior lead analyst at GFMS Thomson Reuters, said: "Indian investors have been betting on the ratio and are long heavily in the physical market."
Ajay Kedia, director, Kedia Commodities, said: "The gold to silver ratio, currently trading at 78.1, has fallen almost 3.8 per cent in three sessions, from a high of 81.18 prior to sanctions and is now heading towards 72 levels. This indicates silver will continue to outperform."
The had earlier occurred in early 2016, when silver prices went in six months from Rs 33,000 to Rs 48,930 a kg. "This time," says Kedia, "lingering trade tension between the US and China and winding-up of short position speculators in the international market since last week will lend further support to silver, which could lead prices to test Rs 43,500 levels soon."
His target in the medium term for the ratio is 61.66, the long-term average. Hence, silver's price could go up to Rs 48,000 a kg. The ratio might fall even if gold's price falls but the current scenario suggests that will not happen.
According to the global survey for 2018 by The Silver Institute, a high gold to silver ratio "indicates the market had been expecting another major crisis or, at the least, that it was about time for equities correction and, therefore, investors had been accumulating physical gold in the market." It, however, adds that "the high ratios of gold to silver might suggest that the latter might be a better investment compared to gold in the long run on a 'catch-up' argument. We should not ignore gold's role as a safe haven and that some smart money has been hedging against geopolitical risks and potential correction in equities".