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In global markets, prices jumped to $22.83 an ounce, the highest in almost seven years.. Photo: Hemant Mishra/Mint
In global markets, prices jumped to $22.83 an ounce, the highest in almost seven years.. Photo: Hemant Mishra/Mint

What the gold-silver ratio tells us about rally in silver prices

  • As economies gradually reopen, industrial demand for silver is expected to pick up pace alongside the strong investment demand witnessed in the second quarter
  • With the Chinese economy showing some signs of revival, prices of base metals have rallied, and so, a rub-off is also there

Silver has hogged limelight, outperforming safe-haven asset gold in the past few trading sessions. On the MCX, silver prices surged to 61,130 per kilogram on Wednesday. In global markets, prices jumped to $22.83 an ounce, the highest in almost seven years.

As economies gradually reopen, industrial demand for silver is expected to pick up pace, alongside the strong investment demand witnessed in the second quarter. Secondly, with the Chinese economy showing some signs of revival, prices of base metals have rallied. So, a rub-off is also there, analysts said.

Further, a look at the popular gold/silver ratio, indicates that this rally has more steam to it.

In simple terms, the gold/silver ratio measures the relative strength of gold versus silver prices. It shows how many ounces of silver it takes to purchase one ounce of gold. This ratio is calculated by dividing the current gold price by the current silver price. When the ratio is high, the general consensus is that silver is favored. This is because, relative to the ratio, silver is somewhat cheap.

“Gold-silver ratio shows that silver underperformed gold in the first quarter despite rising global economic uncertainties. In the past few trading sessions, this ratio has surged to around 99 levels, indicating that silver is making a comeback after a long slumber. Even at the current level of 86, the outlook for silver remains more positive than for gold," said Sugandha Sachdeva, VP-Metals, Energy & Currency Research, Religare Broking.

Sharing the optimism, Sriram Iyer, senior research analyst at Reliance Securities Ltd said, “This Wednesday, it took about 83 ounces of spot silver to buy one ounce of spot gold. While that’s well below levels of more than 120 seen in March, it remains higher than the average of about 69 over the past decade. So, silver maintains solid chances to develop more momentum supported by the weak US dollar and declining gold/silver ratio. Technically, international silver next levels will be USD25/ounce, if the current momentum continues. Key support is at USD20/ounce."

A slew of fundamental factors has worked in favour of silver. For instance, declining silver mine supply, especially from Latin America, where much of the world's silver is produced. Liquidity infusion by global central banks and strong investment demand for silver, indicated by rising ETF inflows, bode well for silver.

“In the immediate short term, prices can cool-off a bit after the strong surge but any weakness would provide an opportunity to ride the uptrend. On its way up, silver prices in the domestic market could surge to 68000/kg and may eventually test a record high towards the year end. Consumption demand for gold, on the hand, may remain muted. Even if one draws an analogy of the current situation with the financial crisis of 2008, the gold-silver ratio is titled in favour of silver," Sachdeva added.

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