Gold/Silver ratio heading lower

2012-MAR-16

Precious metals enjoyed a decent rebound yesterday, following the price dips on Wednesday. Gold rose to $1,648 at yesterday’s London PM Fix, having fallen below $1,640 earlier in the day, but has gone nowhere since. The bulls will have to take the price through selling resistance around $1,680 soon if they are to recover the upward momentum seen in the yellow metal since the beginning of the year. Despite the declines this week, it’s important to remember that gold is still up over 5% year to date, and by more than 16% over the last 12 months.

Silver has reacted impressively to the setbacks earlier this week and has found buying support around $32-$32.50, but needs to recover back above $33 before we can be more confident that this short-term decline is over. Silver has performed much more impressively than gold since the start of the year – up 16.26% – but over the last 12 months is down 9.78%. The fact that gold has outperformed silver comprehensively over the last year is down to the extreme volatility seen in silver at the start of 2011, which scared many people away from buying silver. It’s also a result of the incessantly bearish news that dominated headlines for much of the latter portion of the year – about America’s debt ceiling problems and Europe’s sovereign debt crisis. Gold always outperforms the other precious metals in this kind of environment.

But now, the tables have turned. While America and Europe’s debt problems are very far from solved, central banks are at least succeeding in temporarily papering over the problem, courtesy of QE, LTRO, “Twist”, and all the other acronyms used in aid of money printing and suppressing interest rates. The European Central Bank’s balance sheet has surged since last autumn, while in America, broad money supply measures continue to increase.

Over at King World News, James Turk argues that rising inflation will encourage further gains in precious metals. Likely, the gains over the course of this year will be skewed in favour of silver over gold, as rising industrial demand for the white metal combines with growing “inflation-hedge” demand from investors.

Today’s US Consumer Price Index numbers will provide more clues as to the pace of recovery in America. Consensus estimates are for a 0.5% month-on-month increase. But don’t be surprised if we get a slightly higher figure.