Gold prices have seen a runaway rally, as precious metal's safe-haven status caused investors to flock to the asset. In comparison, prices of the white metal silver, have not seen much of a movement. This caused the Gold-Silver ratio to climb past the 100-mark, a level not seen in over 5 years since the COVID-19 pandemic.
The ratio represents how many ounces of silver it would take to buy an ounce of gold. Simply put, as gold prices skyrocket while silver prices underperform, it would take more silver to buy the same amount of gold.
However, the ratio indicates a bullish turn for silver. "This level implies that either silver is significantly undervalued or that gold has become overvalued. Given the scale of gold’s recent appreciation and the potential for increased volatility, a pullback in gold or a sharp move higher in silver could occur," noted Jigar Trivedi, Senior Analyst, Reliance Securities.
The long-term average for this ratio hovers between 60 to 70. Due to extraordinary circumstances, the demand for the yellow metal has spiked, and it is unlikely to come down. As a result, some analysts expect silver prices to rally sharply, which would bring the ratio down to the 80 to 85 level.
The unrelenting demand for gold, which has continued unabated, driven by a combination of macroeconomic, geopolitical, and market dynamics, is expected to support gold prices through any corrections.
"Continued central bank buying, persistent inflation owing to trade tariffs, monetary policy shifts - like declining interest rates from central banks because of slow growth - are some of the factors which will keep prices elevated," noted Bhavik Patel, Senior Analyst, Tradebulls Securities.
However, on the flip side, silver has not joined in on the rally. While silver commands safe-haven status, it also functions as an industrial metal and can function as a proxy for the global economic sentiment. The geopolitical volatility and fears of a wide-spread recession have capped the gains on the white metal. "Trade tensions and global economic uncertainty have weighed on industrial demand, keeping silver under pressure," noted Trivedi.
However, the divergence in prices from gold creates a strong case for silver to outperform in the months ahead, especially if demand for industrial metals begins to recover, added Trivedi.
Between gold and silver, which has a more bullish outlook?
Gold has already rallied significantly, and while it remains a reliable hedge in uncertain times, the upside may be limited in the near term as markets begin to price in existing risks. Trivedi said, "Silver, by contrast, has underperformed and still holds untapped potential. Its use in renewable energy technologies and its current undervaluation relative to gold make it a compelling investment choice."
Historically, silver has outperformed gold in scenarios where economic activity has picked up. Silver being a broad-based commodity is more useful as industrial commodity, than an investment commodity like gold.
"So silver may take over the reins of rally from here, but the meaningful outperformance will only come once trade talks between U.S. and its trading partners come to a fruitful outcome. That way, demand for industrial metal will return and we will see silver taking over from gold," said Patel.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
