Shanghai Gold-Silver Ratio Falls to Near 40, Financial Institutions Strengthen Risk Control

Generally speaking, gold has almost 100% financial properties, while silver has both financial and industrial properties. Therefore, the narrowing of the gold-silver ratio is seen as a signal of economic recovery. However, the rapid narrowing of the gold-silver ratio and the high premium of domestic silver cannot be fully explained by this alone. On January 28th, a research director of a futures institution told reporters that there is a significant premium of domestic silver compared to foreign silver, mainly due to a sudden increase in short-term investment demand. In addition, the reasons for the premium of domestic silver are multifaceted, including the faster growth of demand in the photovoltaic and new energy industries, long-term quota restrictions on silver imports and exports, continuous reduction of silver stocks on the Shanghai Gold Exchange, among others. Also, the smaller capacity of the silver market, higher price elasticity than gold, and the influx of speculative funds further fuel the fire. Therefore, the domestic silver price in the near future may be driven by industrial demand and speculative funds. Looking ahead at the future trend of the gold-silver ratio, the analysis by Huatai Securities' Gold Department shows that based on historical data since 1991, when the overseas gold-silver ratio is below 60/55/50, the average return of London silver spot in the next month is 0.12%/-1.26%/-0.43%, while the average return of London gold spot is 0.56%/0.09%/1.57%. Based on this judgment, the short-term risk of silver may rise, and the cost-effectiveness of gold allocation may be higher than silver. Huatai Futures also stated that the long-term gold-silver ratio may trend towards below 40. In the short term, influenced by industrial commodities, caution is needed for unilateral chasing of silver. The institution provided a recommendation to short the gold-silver ratio at high levels for arbitrage.