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The gold/silver ratio has been hovering around 71 for the last two weeks, which means that a troy ounce of gold is currently equivalent to 71 troy ounces of silver. It is the first time in five years that the silver price is so low compared to the Gold price, but according to UBS analyst Dominic Schnider, that situation won't stay the way it is for long.
According to Schnider, silver is currently relatively cheap, as he foresees a drop in the gold/silver ratio to 65.6. This is in line with the average of the past three decades. "The gold-to-silver ratio is close to crisis levels, ignoring the fact that economic activity will pick up next year. The increases in silver ETFs suggest that silver investors are very steadfast and that the precious metal is still in the interest of investors," the UBS analyst told Bloomberg.
Total holdings of silver ETFs have increased by 3% this year, up from 571.6 metric tonnes of silver. According to figures from Bloomberg silver ETFs worldwide held 20,182 tonnes of silver at the beginning of October. Last year, 459.5 tonnes of silver were added to exchange traded funds worldwide.
While silver ETFs are growing, gold ETFs are emptying assets. Last year, gold ETFs globally liquidated 33% of their gold holdings, and this year another 5.5% has disappeared from the vaults.
UBS expects that a further recovery in the economy, combined with continued strong demand for physical silver among investors, will boost the silver market. That was not the case in 2014, because since the beginning of this year, gold has done much better than silver. The yellow metal is currently up 2.6% from the beginning of the year, while silver is down more than 10%.
Schnider's words sound promising, but practice will have to show where silver stands in relation to gold. Historically, gold was about 16 to 20 times more expensive than silver, but that was at the time when both precious metals still played a monetary role. Over the past three decades, gold has been on average 65 times more expensive than silver. In 2011, the price of silver reached a peak of $49 per troy ounce as a result of speculation. At that time, silver was more than twice as expensive as gold as it is now.
Unlike gold, silver is primarily an industrial metal. Figures from the Silver Institute show that about half of the global demand for silver is accounted for by the industry. In the gold market, that's only 10% of the annual supply.
Despite Dominic Schnider's moderate optimism, UBS expects a further decline in prices for both precious metals. For the end of 2015, the Swiss bank foresees a gold price of $1,050 and a silver price of $16 per troy ounce.
