By Mark Robinson 25 August 2016
Precious metal investors who have ridden the gold bull rally might want to switch some exposure to silver judging by an indicative valuation metric.
The yellow metal has risen an astonishing 26 per cent in 2016 thanks to various macroeconomic events and its rise means the gold/silver ratio – the amount of silver it takes to purchase one ounce of gold – now stands at 71, or 11 per cent in advance of the five-year average.
When the ratio is relatively high, it is generally held that silver should be favoured; conversely, a low ratio should get gold bugs going.
The price of silver is up by just 0.35 per cent this year, but there is now some evidence to suggest the metal is being supported by a weakening dollar rate, as the metal is less expensive to foreign currency holders looking for a physical hedge as the greenback tracks lower.
Ultimately it’s a binary argument, but by the same token, just because silver appears relatively inexpensive it doesn’t necessarily follow that gold is overpriced in absolute terms. Still, if forced to go out on a limb, we would have to say that exposure to the silver price is likely to be the more profitable option at the moment.
That said, many believe precious metals markets are now routinely distorted due to the preponderance of paper in the market. According to some anecdotal sources, you might be expected to pay well in advance of the current spot price of $1,339 an ounce if you were buying physical gold on the streets of Shanghai or Jaipur.
The gold price is set according to thousands of daily transactions on the London bullion market and Comex exchange futures in New York, but there are some gold bugs who maintain markets either side of the Atlantic are now awash with so many gold-backed paper contracts that physical delivery would prove all but impossible. In other words, prices are kept artificially low through bullion that simply does not exist.