Ongoing concerns over global growth and market volatility have been good news for one of the world’s oldest ‘safe’ assets, gold.
Escalating risks to international trade and the likely impact of tariffs on growth and inflation have sent investors scrambling for the yellow metal, which over the last 12 months has surged nearly 29% to US$1,542 an ounce, highs not seen since 2011, the deep point of the European sovereign debt crisis.
And the high tide of gold prices appears here to stay, at least according to analysts at UBS, who said in a note on Wednesday that the persistent uncertainty was likely to keep gold “well supported” going forward.
The Swiss investment bank also saw “ample room” for prices of the yellow stuff to rise even further as they remained low in comparison to the decade high of July 2011 when gold hit US$1,838 an ounce.
“We continue to see gold rallying to as high as US$1,600 between now and year-end, albeit with a potential pit stop around US$1,580”, UBS said.
The bank added that recent headlines concerning a de-escalation in trade tensions between the US and China, which have rocked the world’s stock markets over the past year, have not been enough to trigger a decline in the gold price, suggesting that there is a “relatively high threshold” for easing investor’s concerns over the global economy.
Meanwhile, silver, gold’s less expensive sister, has been having a rally of its own, rising 29% to US$18.4 an ounce, as traders are increasingly drawn to the metal as a cheaper method of capitalising on gold’s upswing.
UBS said this idea was “even more attractive” considering that silver had been lagging behind gold recently and the metal would be “dragged higher”, adding that they expected silver to hover around US$18 an ounce in the short-term with risk “skewed to the upside”.
Analysts also said that “more substantial easing” by the US Federal Reserve, which is currently under pressure to cut interest rates again having already done so in July, would provide a “clear upside catalyst” for silver, and with current macro-economic developments this risk was rising.
The prospect of more central bank intervention in foreign exchange markets, with China having devalued the renminbi against the US dollar earlier this month, was also likely to boost the price of gold.
However, the bank remained sceptical that silver could end up outperforming its more expensive sibling given the slowdown in global growth and an “elevated” risk environment.
The relationship between gold and silver prices
Prices of gold and silver tend to move in tandem in the commodities markets, rising and falling more or less in sync, however, this is not always the case
In this case, traders often look to the gold/silver ratio, which aims to reflect fluctuations in the price of gold and silver relative to each other.
Put simply, the gold/silver ratio charts how many ounces of silver it takes to purchase one ounce of gold.
If the ratio is 50 to one, it will take 50 ounces of silver to buy one ounce of gold, a high ratio (e.g 100 to one) indicates that gold’s value is up, whereas a lower ratio (50 to one or lower) shows that silver’s value is up.
Joni Teves, a UBS strategist, says that given the high positive correlation between the two metals, the ratio serves as a “signal” that something is causing them to move more significantly relative to each other, which helps traders determine whether to buy or sell either of them.
She adds that some traders can even trade the ratio itself, betting on whether the value of gold or silver will move up to down relative to its sibling.
As of 28 August, the gold/silver ratio stands at 84 to one, indicating that 84 ounces of silver will buy one ounce of gold, a relatively high ratio suggesting that silver's ascent is stopping slightly short of the gold rally.