LAWRIE WILLIAMS: Gold:Silver ratio elevated again and may stay high

After falling to around 79, the Gold:Silver Ratio (GSR) which effectively measures the amount of silver needed to but one ounce of gold has now bounced back again to around 86 or 87, still comfortably below the peak of over 90 reached earlier this year.  A number of precious metals analysts and investors had predicted falls in the GSR to the low 70s or below thus favouring silver investment over gold, but this has not been the case so far with the white metal mostly underperforming its yellow cousin.

We were among those tipping the more volatile silver over gold as the better investment option given silver’s historic relationship with gold which tends to see it outperforming when gold is rising, but underperforming in a falling, or static, gold market.  The latter certainly seems to be the case over the past few weeks when the gold price has turned weaker and has given up some of its earlier gains.

We still rate silver as having the potential to outperform gold in the medium to long term, but this is happening far slower than we anticipated earlier.  Given its underperformance over the past few years when gold was in the doldrums, silver has largely fallen out of favour with investors who have been mainly seduced away by the seemingly ever-rising equities markets, generally ignoring how vulnerable the latter appear to be if looked at from a historic perspective.  The parallels for equities with the 1929 mega crash do seem to be worrying.  This was pointed out vey succinctly in the latest ‘Things that make you go hmm..’ newsletter (www.ttmygh.com) newsletter from Grant Williams as it has been by several other analysts who look at these trends too!

As I write the GSR sits at 85.68 with the gold price at around $1,470 – a little higher than its overnight close, but that tends to have been the pattern of late.  Gold makes gains in Asia and Europe but is brought back down again in the U.S. market, pretty much relating to market interpretation of the latest U.S. government-released economic data. Yesterday’s employment and consumer confidence data was largely neutral and although the OECD lowered its predictions on global and Chinese economic growth in 2020 the reductions were small, with both remaining positive, warding off fears perhaps of a likely short term global recession.

U.S./China trade talks, however, seem to be entering another difficult period with both sides sticking to seemingly intractable positions. This has not been helped by the U.S, Senate decision to castigate China over its Hong Kong difficulties and even the Phase 1 mini-agreement now seems to be in doubt.  President Trump is threatening further tariff increases on Chinese imports.  All in all this could lead to weakness in U.S. equities given some high flyers like Apple rely heavily on Chinese manufacture of some of its key products.  If equities start to fall this would probably be beneficial for precious metals as investors flee into safer havens.  But so saying, although the major U.S. equity indices all fell yesterday, the falls were relatively small and market observers are expecting these falls to be reversed today in line with Asian and European markets which have been rising so far.

So what do we recommend here vis-a-vis silver investment.  We do still expect to see gold rise towards the end of the year and in early 2020 and, as mentioned above, silver does tend to outperform gold in a rising market so it could be the better bet looking ahead.  But our earlier predictions of a short to medium term fall in the GSR to 70 or below appear to have been over-optimistic and while we think this is still likely in the longer term we may well expect this progress (as far as the silver price is concerned) to be relatively slow.  In this we concur with the recently expressed opinion from London-based precious metals consultancy, Metals Focus, which commented that the GSR was likely to remain elevated for some time to come.  As with all such predictions, the timescale for any progress remains unspecified and if a global crisis, or really poor U.S. economic data leads to a rapid increase in the gold price, silver would likely react accordingly and the anticipated sharp fall in the GSR could occur sooner rather than later. 

Overall though we would expect the downside for an investment in silver would be pretty limited at current price levels while the upside potential may lie further ahead than we had earlier expected, but still remains good for those prepared to wait it out!

22 Nov 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com