Idea of the Day: is it time for silver to shine?

What: The gold/ silver ratio is suggesting that silver could become the precious metal of choice, after the ratio has risen to its highest level since March 2016. When this ratio is high is suggests that silver is looking cheap relative to gold, which can spur demand.

What: The gold/ silver ratio is suggesting that silver could become the precious metal of choice, after the ratio has risen to its highest level since March 2016. When this ratio is high is suggests that silver is looking cheap relative to gold, which can spur demand.

How: Many experienced precious metals traders use this ratio to help them to determine the optimum time to buy gold or silver.

Right now, markets are difficult to read – stocks have been falling this week, but volatility remains close to historic lows. Bond yields are low globally and the oil price is falling. This could boost silver’s attractiveness relative to gold, because it tends to have a higher beta to risky assets compared to the yellow metal. Thus, as long as volatility does not spike in the short term, then silver may outperform gold.

From a technical perspective, silver has found decent support around $16.40; this could open the way to a recovery back towards $18. Silver bulls may also be emboldened by the fact that during the recent sell off the price did not fall to $16, the low from mid-May, suggesting that there is latent demand for this precious metal.

We recommend keeping an eye on the Gold/Silver ratio, if we are correct, then silver should start to rally, partly because it is looking better value than gold.

Figure 1:The Gold/ Silver ratio 

Source: City Index and Bloomberg

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