One wonders if Kim Jong Un has gone long on the gold price. Values of the precious metal eclipsed the $1,300-mark to reach an 11-month high, as investors rushed to shelter money after the latest missile from North Korea hurtled over the Japanese island of Hokkaido. Meanwhile, the spot price for silver reached fresh 12-week highs as the dollar extended its downward spiral. This is instructive if you take the view that precious metals are essentially surrogates; their value rests primarily on the degree to which the public trusts government-backed currencies.
You would imagine that prices for precious metals trend upwards during times of geopolitical instability. Less well appreciated is the upward trend that accompanies periods of relative price volatility between these metals. The gold/silver ratio simply expresses the number of silver ounces you could purchase for the price of an ounce of gold. Although prices for both metals can (and often do) rise or fall in tandem, their relative movement differs – and this is the whole point of the ratio. Theoretically, it provides an indicator of when to switch holdings when it breaks historically determined inflection points. Even though you can plot a price correlation, strictly speaking, the ratio doesn’t describe where silver or gold is in the price cycle; but rather, their likely trajectories. Historical precedent suggests that when the ratio hits the upper inflection point (ie, 80:1), silver outstrips gold on a relative basis.
However, the ratio has only become indicative with the rise of fiat currencies. In general terms, a ratio of 16:1 held sway from the 4th century BC until the last quarter of the 19th century – over 2,000 years. Let’s take a biblical perspective: if, say, the 30 pieces of silver doled out to Judas Iscariot were Tyrian shekels (used to pay the temple tax in Jerusalem), they would have weighed roughly 14 grams apiece or 420 grams in total. That’s equivalent to 13.5 ounces with an aggregate value of $235 at today’s prices. An ounce of gold therefore, would have set you back just $278 at the time. That might seem absurdly cheap by today’s standards, but we tend to forget silver’s historic primacy in numismatic matters (the Hebrew word for money is 'keceph', translated as 'silver').
The ratio is now bobbing around the 74:1 mark, after having breached the indicative 80:1 level in February 2016. The latter measure is potentially significant as silver prices have outperformed gold – and, indeed, have risen appreciably in actual terms – whenever this level has been attained since the late 1980s. Why should this level represent an inflection point in the relationship between the two metals? Certainly, it doesn’t go unnoticed by precious metals analysts. But it’s hard to say if enough institutional investors take their cues from the measure to make it self-fulfilling (as is the case with some strands of technical analysis), whereby enough people buy into a given system to precipitate the desired outcome.
Nitesh Shah, Commodities Strategist at ETF Securities:
Our long silver ETPs have seen outflows of $88.6m in the past month and $34.4m in the past three months. However, there were strong inflows in May and July, leaving year-to-date inflows of $136.7m. Recent outflows indicate profit-taking as the price of silver is up 12 per cent since 7 July 2017.
Silver is cheap relative to gold, with the gold-to-silver ratio having been elevated for most of this year. Inflows into silver exchange traded products (ETPs) came as this ratio reached regional peaks as investors hunted for a bargain. As the ratio has eased, (silver prices rose more than gold), investors sold out of their positions.
We believe that in the absence of geopolitical shocks (such as the current North Korean saber-rattling), silver is likely to rise, while gold prices fall. Gold will come under pressure from US interest rates rising, while silver will receive support from continued growth in global industrial activity. More than 50 per cent of silver is used in industrial applications compared with less than 10 per cent for gold.
