What’s in Store for the Gold-Silver Ratio?



Gold-silver ratio

Gold substantially led precious metals into gains in the first part of this year. However, silver significantly overtook gold in April and rose 17.1%, compared to a 5.8% rise in gold. The comparative outperformance of silver is most likely due to the following dual impact on silver:

  1. weakness in the US dollar, which helped all the precious metals
  2. industrial recovery

Silver is used significantly in the industrial sector, so it rises with increasing optimism in the sector.

The gold-silver spread, or the gold-silver ratio, is an important element to consider when doing a comparative study of these two precious metals. The gold-silver spread was trading at 73.6 as of May 2, 2016. The ratio suggests that it requires almost 73 ounces of silver to buy a single ounce of gold.

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RSI level

The RSI (relative strength index) level for the ratio is 34.9, significantly above 20 in the previous week. A level above 70 indicates that an asset has been overbought and may see a downward revision. A level below 30 indicates that an asset has been oversold and may see an upward revision.

What’s next?

The ongoing conundrum on whether the Federal Reserve may raise interest rates and the prevailing weakness of the US dollar may continue to strengthen precious metals. According to TD Securities, silver has been significantly more robust with respect to the historic trough-to-peak price movements about gold. A higher gold-silver price ratio, tightening fundamentals, and higher volatility may propel silver prices to more than $20 per ounce in the first half of 2016. Given the strength in gold, this may bring the gold-silver ratio as low as 62 by mid-2016.

The comparative performance of gold and silver can also be studied by way of funds such as the iShares Silver Trust (SLV) and the iShares Gold Trust (IAU). Other mining funds that closely follow gold and silver include the Global X Silver Miners ETF (SIL) and the VanEck Vectors Junior Gold Miners ETF (GDXJ).


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