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Silver’s 2020 rally sees its ratio to gold increase significantly

18 August 2020

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by Henré Herselman, FX and Derivatives/ Brad Taylor, Senior Portfolio Manager

Recently, in an article entitled, The gold price reaches new highs, while the US Dollar Index slides, we wrote about the performance of the gold price from a technical perspective. In this note, we ask the question whether investors should buy gold or silver? Precious metals have done phenomenally well this year and even the so-called Oracle of Omaha, Warren Buffett recently purchased a stake in Barrick Gold. But, what about Silver? The precious metal recorded a stellar 2Q20 performance on the back of higher industrial demand expectations and, much like gold, its safe-haven appeal. This silver price rally continued in July and August, with the metal recording an impressive performance month to date. In this article, while we do not discuss the fundamentals behind silver and its recent rally, we attempt to provide a technical perspective on the metal. Silver is an industrial commodity used in applications as diverse as jewellery, tableware, dentistry, electrical contacts, batteries, computer motherboards and more.

The gold/silver ratio is an important metric that many analysts follow for perspective on the valuation of the two metals. The ratio is easy to calculate by taking the price of gold and dividing it by the silver price. Calculating the ratio of gold to silver (see Figure 1) shows that this ratio has been extremely volatile since 1995, trading historically between 85x and 40x, with a few even more extreme outliers. Since this ratio can fluctuate materially, it gives investors an idea of how one precious metal can substantially outperform the other. Since 2011, gold has had the upper hand, rallying from depressed levels of below 40x silver to a level above 110x more recently. This as the gold price hit record highs on the back of mounting concerns surrounding surging COVID-19 cases in the US and fears around renewed tensions between the US and China.

Figure 1: The ratio of gold to silver

Source: Bloomberg, Anchor

However, in July 2020, silver rallied hard, breaching the $20/oz level on 21 July for the first time since 2016. Then, on Friday (14 August), the silver price roared past the $26/oz level, with spot even reaching $29/oz according to Reuters, before pulling back. After breaking through this $26/oz technical level, it is not impossible for the metal to rally further past the psychological $30/oz level over the medium term. We highlight though that, despite its stellar gains this year and having jumped by c. 39% since mid-July, the silver price remains well below its all-time high of $49.24, reached in March 2011. So, while the gold price has topped previous records, the fact that silver still has significant upside vs its all-time high, could attract more investors to the metal.

Silver’s rally YTD has also resulted in its ratio to gold dropping dramatically – from around 110x to c. 75x. This sharp reversal has broken gold’s outperformance relative to silver. From a technical perspective, this means that silver now has stronger momentum behind it relative to gold and, if the basket of precious metals’ upward momentum continues, silver indeed warrants a buy.

 

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