Gold-Silver Ratio: There Will Be More Monetary Policy Pain Before Link Breaks - Capital Economics
(Kitco News) - Despite healthy industrial demand, investors can expect to see silver continue to underperform gold, as it won’t be able to shake its monetary-metal profile, said one commodity analyst.
In an interview with Kitco news, Simona Gambarini, commodity economist at Capital Economics said that it will take a further normalization in U.S. monetary policy that will drive gold prices lower, before silver finds its industrial luster again.
“Normally, silver should outperform gold when global [Purchasing Manager Indexes] start to rise,” she said. “However, monetary policy and a stronger U.S. dollar are having more impact on gold, which is dragging silver lower,” she said.
Gambarini’s comments come as silver pushes further below the key psychological level of $16 an ounce. At the same time, gold prices have dropped to fresh four-month lows as the market broke its tightest trading range in more than a decade.
Silver’s underperformance has pushed the gold-silver ratio to a new one-year high. Kitco.com showed the gold-silver hit a high Thursday at 79.90. March silver futures settled the day at $15.690 an ounce, down 1.5% on the day. At the same time, February gold futures last traded at $1,253.10 an ounce down more than 1% on the day.
Gambarini noted that while silver’s industrial outlook remains bright, led by growing demand from the tech sector, the market is seeing record low investor interest as bullion coin sales have weakened significantly this year.
“Normally when prices fall there is usually a big reaction in physical buying but we aren’t seeing,” she said. “Investors are starting to price in higher expectations for more Fed tightening. We need to get past monetary policy before investor sentiment improves.”
Capital Economic is fairly hawkish on U.S. monetary policy as they expect to see four Federal Reserve interest rate hikes next year. Currently, markets are only pricing in a 50% chance of two rate hikes by November 2018.
Gambarini, said this aggressive central bank action will keep gold at around $1,200 an ounce next year. She added they see it as the floor, with gold remaining buoyed from ongoing safe-haven demand.
“We probably need to see a normalization of monetary policy before we see a breakdown between gold and silver,” she said.