Silver Lining

The price gap between gold and silver has widened significantly over the past seven years and, following the recent hike in gold, the much-followed ratio between these two precious metals has just touched 90.

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The ten most 'precious' metals, in terms of price, are rhodium, palladium, gold, platinum, ruthenium, iridium, osmium, rhenium, silver and indium. These metals are all grouped together in the middle of the elemental table, and have a wide range of uses. The best known, however, are the two 'coinage' metals of gold and silver, and the price relationship between these third and ninth most valuable metals is widely followed.

Interest in silver has been almost non-existent in recent years, and gold's poor relation has performed poorly as a result. A recent report by UBS asked, "Is silver due to catch up?". In its latest Global Precious Metals Comment, UBS notes that although silver's volatility is still higher than gold it has not been high enough to attract even short-term players. Silver, UBS argues, suffers in comparison with gold because of the greater range of interest in the latter, and by the growing downside risks for silver amid uncertainty around global trade.

Poor investor sentiment has been reflected in exchange traded funds being net sellers of over 11 Moz of silver in the first five months of this year. Nevertheless, UBS says "recent conversations suggest that although most people are getting bullish on gold, they are doing so only up to a point". This conviction starts to falter beyond US$1,375/oz, apparently, despite dovish signals on interest rates in the US from the Federal Reserve.

As the chart below, from UBS, illustrates, the gold/silver ratio peaked at almost 100 in the early 1990s before falling to barely 40 in 1997. After rising to around 80 on two occasions, the ratio fell back towards 30 seven years ago as gold underperformed. 

Since then, the gold-silver ratio has widened, and this is shown in more detail (over the past three years) in the graph below (taken from the commodity database of S&P Global Market Intelligence, using Thomson Reuters price data). This illustrates that the cause is not just the rising gold price but that the price of silver has also weakened. 

With silver currently trading at only US$15/oz, and near an all-time low relative to gold, it seems likely that investors will start paying greater attention to this poor relation of the precious metals group. 

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.