Home >Market >Mark-to-market >Amid trade war jitters, even as gold hits a five-week high, silver remains undervalued

Escalating fears of a trade war between the US and China have seen investors rushing to gold. Further, the appointment of John Bolton as the US President Donald Trump’s new national security adviser who is considered a foreign policy “hawk", could increase geopolitical tensions, adding to the uncertainties for investors.

On Monday, international gold prices touched a five-week high at $1,351.20 per ounce.

“Gold performs two roles," says Ritesh Jain, chief investment officer at BNP Paribas Asset Management India Pvt. Ltd. “One, it acts as a hedge against inflation. The second role is that of safe haven in risk-off periods and that’s what is happening right now, as investors seek safety in all the chaos (potential trade wars, higher crude oil prices) around, leading to higher interest in the yellow metal."

In contrast, silver isn’t as privileged. In the last one year, gold prices increased 8.5% whereas silver prices declined 6.4%, according to Bloomberg data.

In fact, the white metal is rather unloved at the moment. As Chart 1 shows, net short positions in silver are at highs not seen in more than a decade, suggesting money managers are quite bearish on the metal. Investors are liquidating their net long positions in silver with net short at 35,172 contracts as on 20 March compared to net longs of 42,000 contracts at the beginning of 2017.

There is, however, a glimmer of hope for silver in this. Here’s why. Gold’s outperformance has meant that the gold-silver ratio (GSR), a relative method of valuation arrived at by dividing the price of gold with that of silver, is flirting with the highs. Chart 2 shows GSR for March at 81.5, just a wee bit shy of 83, the high seen in February two years ago.

“In terms of value investing, this is an indication that silver is undervalued as compared to gold and all set for an upward rally over the medium term until the ratio converges to its long-term average, providing an investment opportunity," pointed out Sugandha Sachdeva, vice-president (metals, energy and currency research) at Religare Securities Ltd.

But, GSR topping out may not be a cakewalk. According to Jain, “Typically, gold always outperforms silver in the beginning when these metals appreciate owing to a combination of higher inflation and lower real interest rates." However, the reasons for gold shining this time around are due to global “risk-off", and that means even if silver is undervalued, it is not the best environment for investors to start taking an interest in the white metal, explained Jain. “Having said that, looking at the market positioning, I believe we are headed for major volatility in silver," he added.

While there may be short-term gyrations, overall, prices should be underpinned by concerns about a global trade war, rising trade deficit in the US following tax cuts and the chaos surrounding Trump’s administration, says Sachdeva.

What’s somewhat certain, however, is that gold should continue to glitter amid rising global uncertainties.

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