Doubts over the Greek bond-swap deal and worries over Chinese growth have hit the markets this morning, with gold and silver prices suffering owing to “risk off” liquidity concerns. Though overall the Dollar Index (USDX) remains flat, the greenback has risen against the euro in early trading, while prices of important basic commodities such as crude oil, corn and copper have fallen.
The gold price is currently trading around an important support level at $1,700, while the silver price is falling back towards that trading range that has dominated the silver market since last autumn: $28-$35. Just when the bulls thought they’d made it out of the woods last week with a decisive break above $36, here we are again below $35.
Recent weeks have seen silver outperforming gold as measured by the gold/silver price ratio, but more deflationary concerns about global growth will likely mean a rising gold/silver ratio – meaning gold is performing better relative to silver. As seen from the chart below, in contrast to the 30-year trend, recent years have seen a falling gold/silver ratio, with increasing numbers of investors drawn to silver as a more affordable inflation/disaster hedge than gold. Combine this with the relative illiquidity of the silver market in comparison with gold, and you have a good explanation as to why silver has delivered greater percentage gains than gold over the last three years.
However, the silver price remains more vulnerable than gold in the face of deflation and rising fear. So it’s unsurprising that today’s headline news that the Chinese government have cut their growth target this year to 7.5%, with Premier Wen Jiabao warning of slower growth than previous years, has led to declines in silver.
Similarly, disappointing eurozone PMI numbers this morning, coupled with the difficulties of securing a “voluntary” Greek bond-swap deal is causing rising anxiety among market participants. This kind of environment is not conducive to gains in silver. How gold reacts to a formal Greek default will be an interesting gauge of how far it’s come since 2008 in terms of mass perception of it as a safe haven.
