Falling gold-silver ratio could signal more bullish sentiments for bullion

Nov 26, 2014 - 9:01 AM GMT

Spot silver price hit a recent high of $16.74 per ounce, its highest since its dramatic slump to a 55-month low on 30 October. The bargain hunting seen in silver could signal better sentiments ahead for bullion.

The gold-to-silver ratio has been rising steadily from 62.81 in August to reach a high of 75.44 on 14 November. The ratio is now at 72.27.

When the ratio is high, the general consensus is that silver is favoured. This is because, relative to the ratio, silver is cheaper.

However, the trend for the ratio is seen reversing down since early November and could mean that investors are now finding it more expensive to hold silver. A low or falling ratio tends to favour gold and may be a signal it’s a good time to buy the yellow metal.

“As silver typically outperforms gold, when you start to see bargain hunting in silver it is often a sign that sentiment for bullion is turning more bullish…one reason for that is that smaller investors and speculators will find silver cheaper to buy,” explains William Adams, Head of Research at Fastmarkets.

At the end of October, gold fell below $1,200 per ounce, hitting its lowest in more than four years after the US economy grew at a faster pace than expected, as well as the official ending of the central bank’s bond buying program.

Bullion price movement since Monday saw gold trading range-bound and on both sides of $1,200 while silver has been steadily rising to hit a three-and-half week highs recently.

The latest Commitment of traders report also saw gold net longs rebuilding positions – the net long fund position (NLFP) jumped 25,379 contracts last week to 81,422 contracts from 56,043 contracts.

“The recent move was on the back of longs re-establishing positions and shorts seeking cover. The bulk of the short-covering likely occurred on Nov 14 when gold prices climbed about $40 – the sharp move higher would have hit plenty of stops along the way,” said UBS analyst Edel Tully.

“The combination of a large gross short position, the price weakness and the more recent price rebound seems to have prompted short-covering, which may now gain momentum…With prices back above $1,180, some of the long-held shorts may well decide a ‘profit is a profit’ and take it, while some of the more recent shorts may be nervous in case they have jumped on board the sell-off too late,” Adams added.

With the Thanksgiving holiday coming up tomorrow, traders expect trade to be thin although prices might turn higher if gold manage to cling onto the key support level of $1,200.