Quote on Gold and silver: The ratio is back at reasonable levels By Carsten Menke, Head Next Generation Research, Julius Baer
Below the Quote on Gold and silver: The ratio is back at reasonable levels By Carsten Menke, Head Next Generation Research, Julius Baer
A higher-than-expected inflation number reinforced fears of further interest rate increases by the US Federal Reserve, in turn putting pressure on gold and silver prices. Beyond these short-term and typically sentiment-driven moves, we believe the fundamental backdrop remains unchanged. We see limited short-term upside for gold and silver as long as the Fed remains in inflation-fighting mode. In the longer term, growing concerns about US indebtedness and associated interest burden should provide support. The gold/silver ratio is now back at levels we consider reasonable, prompting us to close our long position.
The gold and silver markets did not like the US inflation data. A higher headline number, which includes energy prices, reinforced fears of further interest rate increases by the US Federal Reserve. Gold was down as much as 2% after the release, while silver fell twice as much. Beyond these short-term moves, which are typically sentiment-driven, we believe the fundamental backdrop for gold and silver remains unchanged. We see limited upside as long as the Fed is in inflation-fighting mode. The downside should be limited as well, assuming that the Fed will raise interest rates less frequently than currently priced into money markets, which is our view. Looking beyond the current inflation-fighting period, growing concerns about US indebtedness and interest burden should support both gold and silver. Gold also benefits from central bank buying as a strong structural source of demand, which silver does not share. We stick to our established views: Constructive on gold and Neutral on silver. The gold/silver ratio is back at 70, which we believe is a very reasonable level. We therefore close our long-position in the ratio for a profit of more than 20%. Typically, it is trending up in times of slowing growth, reflecting rising demand for gold as a safe-haven and declining demand for silver from industrial users. Conversely, it is trending down in times of accelerating growth, reflecting weakening safe-haven demand for gold and strengthening industrial demand for silver. The ratio is also influenced by the trajectory of the US dollar, moving up when the greenback strengthens and down when it weakens. Since the US economy is set to remain resilient while US bond yields and the US dollar should move lower, the ratio is unlikely to exhibit a clear trend in the foreseeable future.
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