Headwind for silver before outshining gold: Analysts

Bullion traders are waiting with bated breath for the bearish trend in gold to silver ratio to resume during which silver outperforms gold. They expect the gold to silver ratio to fall to 72 and then to 68 before it starts rising again. However, international experts suggest headwind for silver before it outperforms gold.


During the recent rout in base metals, following the trade war triggered by the US, ratio punters were proved wrong and silver price fell sharply compared to gold. As a result, the ratio of gold to silver price has also seen some increase in the last few days.


Gold and silver are related metals with the white metal more volatile between the two. The ratio represents how many ounces of silver can be bought with one ounce of gold and at present the ratio is around 78. It was 82 in April and fell to 75 last week.  The ratio falls when silver price rise is faster than gold or the white metal falls slower than gold.


Bears in the gold to silver ratio segment sell gold in futures or options and buy silver. The ratio falls when silver outperforms gold. The positions are built exactly in proportion to the ratio between the prices of gold and silver.


Ajay Kedia, director, Kedia Commodities, said, “In our polling of traders, we have seen that majority expect the ratio to fall to first 72 and then even 68 in the next three months. Immediately, the weakness in silver may result in the ratio consolidating around the current levels with a mild upside bias.”


On the MCX, overall open interest has increased in the last few days in gold and silver. As of now, top trades on MCX are showing higher short positions for gold and silver.


Analysis of the top 10 long and short positions in gold as well as silver shows that short (bearish) positions are 14-15 per cent higher compared to long (bullish) in both the precious metals.


However, recently, silver’s correlation with base metals has increased and in line with the fall in metals, silver fell sharply compared to gold thus raising the ratio.


Philip Newman, director of London-based research firm Metal Focus, said, “Looking ahead, in the immediate future silver faces headwinds on several fronts.”


His report highlights the concerns for silver as professional traders are not upbeat towards the precious metals, which have been exacerbated by the impact of a resurgent dollar.


The agency also notes that despite the recent fall in US equities many investors still view the slide as a pause, before equities resume their upward momentum.


Metals are falling on trade war fears which destabilises markets and therefore silver is also witnessing a downtrend.


Kedia, however, is of the view that silver will find support from physical buyers because at lower levels Indian investors buy silver.  As seen now, at lower levels, silver stops falling but base metal prices continue to fall.


Gold prices in the international market have corrected from over $1,300 per ounce to $1,273 and silver from the recent high of around $17.35 per ounce to $16.28. Spot price of standard gold in Mumbai was at ~30,620 ($450) per 10 gram while silver was ~38,535 ($566) per kg.