There is a growing demand for “anti-fragile” or “defensive” assets like silver and gold which is rooted in the deterioration in the global economic outlook stemming from the escalation of a trade war and the possible policy responses we could see as a result.
Gold was clearly seen as the first port of call for investors looking for shelter from worst-case outcomes. Of the precious metals, gold is the least industrial and the most defensive. But as speculative gold futures positioning has risen to an all-time high, some investors are rotating to silver, where positioning is less stretched.
The Gold to Silver ratio
The gold to silver ratio had hit the highest levels since 1993 in July 2019, indicating that silver was very cheap relative to gold. However, the ratio has declined marginally in recent weeks as silver has started to rally.
While we don’t think that that the ratio will fall back to its historic average, it is reasonable to assume that it could fall to within a standard deviation of the average.
That would be consistent with our Q3 2019 silver forecast of US$19.90/oz and gold forecast of US$1525/oz.
Toward the end of the forecast horizon, the ratio is likely to rise as the headwinds on silver bite.
Source: Bloomberg, WisdomTree, data available as of close 27 August 2019
In August, we presented some reasons why sentiment towards gold (measured using speculative positioning in gold futures) could remain as high as they are today. Under such circumstances, gold prices could rise to over US$1800/oz in Q2 2020. The silver price that would be consistent with that scenario (holding other assumptions in the model the same) would be around US$21/oz.
The outlook
Our forecasts point to gold remaining the best hedge for longer-term geopolitical concerns (and associated policy responses), but there is likely to be a short-term tactical opportunity in silver. Silver has already begun to rally strongly, and the momentum could continue in the near-term.
