Silver price is set to record its sixth straight week of losses amid a slowdown in the demand for industrial metals. Notably, the price of gold, the leading precious metal, will likely remain on a downtrend in the short term. Even so, the divergence between the two metals may widen even further due to their statuses and prevalent forces.
Silver vs. Gold
The gold/silver ratio is one of the tools used by investors to evaluate if one of the two precious metals is particularly overvalued or undervalued. The ratio represents the amount of silver ounces that are equivalent to one ounce of gold. A rise in the ratio means that an investor will need more silver ounces in exchange of a single ounce of gold.
Conventionally, silver price moves in tandem with gold price. Nonetheless, there has been a major divergence in recent weeks; an aspect observed in the gold/silver ratio. On Wednesday, it rose to 93.10; its highest level since July 2020. While it has since eased, it has remained above 89.65 since surging above it a week ago. Notably, that level had been evasive for about two years. As at the time of writing, it was at 90.79.
On the one hand, gold is a conventional hedge against inflation and safe haven in times of economic turmoil. Silver, similar to other precious metals such as platinum and palladium, also bears the same status. Indeed, this explains why silver price moves in a similar direction as gold.
Gold/silver ratio in light of recession
Silver price movements are also impacted by its status as an industrial metal. Notably, the gold/silver ratio is an apt measure for the demand of industrial metals. Subsequently, one can tell if the global economy is slowing down or if there is a possibility of a recession.
Silver’s industrial uses account for over 50% of its demand. A contraction of the industrial activities in China- the leading consumer of metals – and the world at large usually leads to a decline in silver’s demand. Subsequently, more ounces of the metal are needed to purchase one ounce of gold; an aspect that is presented in the form of a higher gold/silver ratio.
A strong US dollar and Fed’s hawkish stance has led to a decline in gold price. While the downtrend may persist in the short term, I expect the divergence between gold and silver price to increase in the short term. Amid the risk-off sentiment, gold may rebound even though subtly as recession concerns rise. At the same time, the slowed demand for industrial metals will likely continue to weigh on silver price.
