That sky-high gold/silver ratio is starting to come down a bit.
The ratio is simple – the price of gold, divided by the price of silver. Since 1970, the ratio’s averaged about 54. But it spiked to about 84 last month, and is still relatively high at about 78, though, as you can see below, it’s starting to fall.
What’s the significance of the ratio? Marketbeat does a good job explaining it:
Commodity investors often look at these ratios for clues, as hard assets such as oil, gold or wheat don’t enjoy handy investing yardsticks like the price-to-earnings ratio on stocks. Some ratio plays have fetched hefty gains in the past. In Feb. 2003, the gold-silver ratio spiked to 80, which heralded silver’s one-year ride from less than $5 a troy ounce to above $8 in April 2004 – a 60% return.
But, the ratio hasn’t exactly worked this year. Since reaching 60 in August, silver’s fallen even more than gold — though, as always, there are rumours of market conspiracies, silver short-selling by big financial players, etc. More mainstream explanations maintain that silver is one of those precious metals, like platinum, whose demand derives mostly from industrial applications — not necessarily as a store of value against inflation (like gold). Thus gold’s increase this month as the US dollar declines.
Now, there may be signs of silver catching up to its more expensive precious metal counterpart. Buying silver while selling gold — in effect betting that silver will outpace gold and go back to its historical average ratio — is already a popular trade. It’s not guaranteed to happen, (clearly just look at the historical gold/silver ratio below) but it’s certainly something commodities investors will be looking at.
See Gijsbert Groenewegen of Gold Arrow Capital Management, quoted on Bloomberg, for instance.
‘Silver is ridiculously cheap,’ Groenewegen said. ‘In all this financial turmoil, precious metals are the place to be. People are going to realize that silver is just as much of a safe haven and currency as gold and it’s going to go much, much higher.’
Related links:
Golden ratios – Marketbeat
Hi, ho silver! No, wait… – FT Alphaville
____