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Commodities

Asian investors help drive gold-silver ratio to post-Lehman highs

Price of yellow metal soars amid turbulent markets and rising global tensions

The gold-silver ratio has stayed above 80 since February 2018, indicating a jittery investment environment.    © Reuters

TOKYO -- Asian investors are fleeing to gold as a hedge against turmoil in financial markets and geopolitical risks, pushing the gold-silver ratio to post-Lehman highs.

"Investors are pouring their money into the safe haven of gold," said Yuichi Ikemizu, Tokyo branch manager at ICBC Standard Bank.

The gold-silver ratio -- the price of gold divided by that of silver -- is an indicator of how investors value the two metals. Simply put, it represents how many ounces of silver can be purchased with one ounce of gold. Although prices for the two metals mostly move in tandem, investors prefer gold in times of crisis, hence the shifting ratio.

Currently, international gold prices are hovering at around $1,310 per troy ounce, about 83 times higher than silver's $15.70.

After topping 80 in February 2016, the gold-silver ratio briefly fell but started rising again in 2017 and has remained above 80 since February 2018.

Emerging markets such as India and China are crucial to long-term gold performance. Gold purchases in China, for example, topped 1,151 tons in 2018, up 5.7% from a year ago. This made the country the largest gold purchaser for six straight years, according to China Gold Association.

In India, demand in rural areas and among the middle class is seen to rise following expected tax breaks on gold investments and reduced levies on bullion in the interim budget. According to a local trader, direct tax relief to the middle class will increase demand for gold jewelry.

Jewelry and investment account for 90% of total gold demand, while 60% of demand for silver comes from the industrial sector, which is facing headwinds and keeping the price of the metal down.

The ratio jumped to a record high of 100 during the Gulf War in 1991 and touched 84 during the 2008 global financial crisis. In comparison, the average ratio over the past 20 years stands at about 60.

Monthly trades in gold futures 10 years ago exceeded those of silver by about 2 million contracts. In January 2019, that had risen to 3.36 million.

Gold prices had been under pressure in recent years on the back of rising U.S. interest rates. But choppy financial markets, roiled by the U.S.-China trade war and other global uncertainties, have kept investor demand for the metal high.

Growing sentiment that the Fed is in no hurry to raise interest rates have also helped the yellow metal, pushing gold futures in New York to their highest levels in about nine months.

The World Gold Council echoes investors, predicting that gold will become an attractive hedge in 2019.

With no end in sight to the trade war, many analysts expect the gold-silver ratio to remain high as investors continue to move into gold.

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