Is the Next Great Opportunity Found in the Gold/Silver Ratio?
Thursday April 07, 2016 14:52Is the Next Great Opportunity Found in the Gold/Silver Ratio?
After posting a low in mid-December, gold futures have seen a strong $200 plus rally leaving it up 16.7% year to date catching a bid on safe-haven demand, rising inflation expectations and negative interest rates. While silver usually benefits from a rally in gold, we have not seen the typical follow through that one would expect leaving the gold/silver ratio hovering near crisis level seen back in 2008.
Like a rubber band that gets stretched too far, eventually we tend to see it snap back. Currently the ratio is just over 81 and the high back in March was 83 while in most of 2015 the ratio averaging the mid 70’s. As you can see, this time last year the ratio was near the low of the year at 68.
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So what is going to make silver snap back and get this ratio lower?
Silver should continue to see the three big drivers continue to come into play:
- Safe haven demand
- Low treasury yields
- Weaker dollar
However, over the course of the year inflation expectations should come into play. This is because the Fed has itself caught between a rock and a hard place and interest rate hikes should be kept to one or two hikes. I am leaning more on the one rate hike camp being the likely scenario. In addition, China can be expected to have a looser monetary policy and improving industrial demand.
Industrial demand accounts for more than 50% of silvers total demand. Once this kicks into high gear the ratio should drop back into the 70’s. The best way to monitor industrial demand is to track the Purchasing Managers’ Index known as PMI. A reading over 50 indicates expanding activity; a reading under 50 indicates the opposite. The latest reading on PMI was 51.80 and has been moving higher each month since the start of the year (Jan 48.2 and Feb 49.5).
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By: Phillip Streible
pstreible@rjofutures.com.
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