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Gold-silver price ratio to keep falling as 'undervalued' silver outperforms - analysts

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(Kitco News) - With silver seemingly “undervalued” and the reopening of economies expected to boost industrial demand, traders are looking for the gold-silver ratio to continue its decline as silver continues its recent outperformance.

The view is not unanimous, however, as some traders worry that renewed trade tensions between the U.S. and China could dent industrial demand for silver.

The gold-silver ratio measures how many ounces of silver it takes to buy an ounce of gold, with a rising  number meaning an underperformance by silver compared to gold, and vice-versa. Back in March, the ratio rose as high as 127.

However, just before noon Thursday, the ratio was just under 102 and it was even lower earlier this week. Spot gold was trading at $1,718 an ounce, while silver was at $16.86.

“If I came into these markets and I open up an account with an intention of putting on [a long position in] gold, and then looked at the price of silver, I would buy silver,” said Bob Haberkorn, senior commodities broker with RJO Futures, predicting the metal will hit $20 in a few weeks. “People who were looking to trade gold are now going to turn their head to silver.”

Charlie Nedoss, senior market strategist with LaSalle Futures Group, said the relationship between gold and silver “has been out of line for some time.” Earlier this week, Commerzbank analysts commented that the ratio peaked at 85 during the 2008 financial crisis and that the longer-term average was in the 60s.

“Silver was the laggard,” Nedoss said of the activity during the last couple of months. “I think silver is starting to catch up, but I think there is more room to go.

Nedoss said that he is “friendly” to both commodities. However, like others, he commented that industrial demand should improve as economies start to open up.

“Of commodities overall, silver stands out as one undervalued given the circumstances,” Haberkorn said. “There are a lot of people out there who have been buying gold since this [COVID-19] crisis has been unfolding, [but] buying silver here and there. At this point, with gold above $1,700 an ounce and silver so low, a lot of investors are taking a second look at silver.”

Both gold and silver sold off with all markets back in mid-March when equities were getting hammered and investors needed to raise cash, he explained. However, silver has not been able to snap back as quickly as gold.

“People say silver has industrial uses and the demand isn’t there,” Haberkorn said. “Of course, it has industrial use and it has always had industrial use. But it also has always been a flight-to-safety asset, and it has been throughout history. Silver is pretty low down here below $20 an ounce while gold is around $1,700 an ounce. So I think people are starting to look for silver to make an aggressive move shortly.”

George Gero, managing director with RBC Wealth Management, looks for the ratio to come down to the 90s or even high 80s, although he said there could be a delay due to volatility around expiration of options next week.

“Silver is going to perform a little bit better than it has,” Gero said. “Silver was held back because of its industrial component. Now, with the reopening of many of the economies, the industrial component is a tailwind instead of a headwind.”

Meanwhile, Phillip Streible, chief market strategist with Blue Line Futures, worries that renewed U.S.-China tensions could stall the rally that has occurred in silver and other industrially oriented metals lately, thus he looks for another uptick in the gold-silver ratio.

“I believe if there is any validity to [U.S.] President Trump and China butting heads on current trade policy, we might see silver prices back off a bit from here,” Streible said. “Fifty percent of silver’s demand is industrial demand, at least. It has been tracking copper, platinum and palladium higher.”

Traders will be watching U.S. and Chinese economic data, as well as whether equities top out around their recent highs.

“I definitely think if you’ve been long in silver for a while, you might want to take a little bit off,” Streible said.

Conversely, trade tensions could help gold, since this metal tends to fare better whenever there is any kind of geopolitical flare-ups, Streible said.

“People would liquidate other risk assets and go into gold,” he said. “I am a more a firm believer in gold. The gold/silver ratio has come off quite a bit. It dipped below 100. Now, it could bounce back up.”

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