Gold-to-silver price ratio at 23-year high of 84.78 amid trade war fears

The gold-to-silver ratio has risen to a 23-year high of 84.43, indicating that silver has received heavy pounding in recent times. The ratio represents how many ounces of silver can be bought with one ounce of gold and it is a signal for measuring the relative strength of both the metals compared with each other.

Several traders trade in the ratio, including in India, when they have different views on both the metals.

Silver is a high beta or much more volatile commodity than gold and the ratio keeps changing.

Nigam Arora, a US-based market analyst, said, “High gold/silver ratio suggests continued pessimism towards precious metals, higher rates and industrial use of silver going down due to the trade war. Silver is more volatile than gold. Often silver moves twice as much as gold.”

The peculiarity of silver is that more than half of it is used for industrial purposes, led by solar filmmakers. However, it also has the characteristics of precious metals, and currently, due to trade war fears, industrial demand globally is subdued. As a result, silver prices are falling faster than gold, resulting in a high ratio.

On the MCX, speculative positions in the white metal have built up significantly, taking open interest at a six-year high of around 27,000 lots. A week ago, open interest was at an eight-year high of 31 000 lots. However, top 10 bullish (long) and bearish (short) positions are almost at the same level suggesting volatility ahead as the ratio has broken strong technical resistance.

Top ten long positions have open interest in 11,001 lots while top 10 short positions total open interest is 10,813 lots.

“At the current gold and silver prices, traders on the MCX are not ready to increase their short positions and prefer to wait for a fall to buy as silver has been hammered down internationally,” said Ajay Kedia, director, Kedia Commodities. However, he said the ratio has broken a long-time resistance of 80 and has been under pressure. In the last one decade, silver demand in India has tripled, especially from jewellery and silverware segments, according to data of the Silver Institute.

The Ratio

Globally, gold is showing signs of a market bottom. Rhona O'Connell, head of metals at the GFMS Thomson Reuters said fears (in the financial markets) have re-surfaced and that ultimately will prove to be supportive for gold.

“The net short on Comex was at record levels during end-August with outright shorts standing at 593 tonnes. Some short covering has ensued; we expect more and a sharp short-covering rally is not out of the question,” said O’Connell.

Traders in Mumbai feel that silver may not recover faster than gold. If gold gets short covering but not metals, improvement in silver need not be in tune with gold, they said.

White metal loses sheen
  • The ratio represents how much ounce of silver can be bought with one ounce of gold
  • It measures the relative strength of both the metals
  • Silver prices have been hammered leading to a high ratio
  • Open interest or speculative positions on MCX now at a six-year high

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