The gold to silver ratio is an important metric in precious metals, offering valuable insights into the relative value between gold and Silver. This ratio is calculated by dividing the price of gold by the price of silver. The ratio has historically demonstrated cyclical behaviour, reflecting the underlying economic conditions.

During periods of economic distress or deflation, the ratio rises as gold, viewed as a more stable store of value, becomes more desirable. Conversely, in times of economic expansion, when industrial demand for silver is increasing, the ratio often declines. Investors, traders, and economists closely monitor this ratio to gauge the market sentiment and identify potential investment opportunities.

The behaviour of the gold to silver ratio during market crises and recessions further underscores its significance. The ratio often rallies during market disruption and instability, reaching its peak in a recession. This article presents a fundamental overview of the gold and silver markets and their correlation to the gold to silver ratio. It is observed that a peak in the ratio signals a significant bottom in the gold and silver markets, offering valuable investment opportunities.

Historical Overview of the Gold to Silver Ratio

The chart below presents the gold-to-silver ratio over the past six decades. It is observed that the ratio fluctuates between 15 and 112, showing an incremental trend over time. Significant peaks were observed in 1982, the early 1990s, and 2020. The peak in 1982 was primarily driven by economic and geopolitical factors that led investors to view gold as a safer asset. During this period, the world was grappling with high inflation, economic uncertainty, and the lingering effects of the 1979 energy crisis.

Therefore, gold experienced a significant increase in demand due to hedge against inflation and economic instability. Meanwhile, silver has industrial and investment demand and did not see the same level of interest, leading to a sharp rise in the ratio. The early 1980s also marked a time when the Federal Reserve aggressively raised interest rates to combat inflation, which further supported the preference for gold over silver as a store of value.

In the early 1990s and early 2020s, the gold-to-silver ratio spiked again, reflecting similar economic uncertainty and market volatility themes. In the early 1990s, the global economy faced recessionary pressures, the Gulf War, and a sluggish recovery from the savings and loan crisis, which caused investors to flock to gold. With its significant industrial demand, Silver suffered from reduced consumption, leading to a widening ratio.

Similarly, in the early 2020s, the COVID-19 pandemic caused unprecedented global economic disruption. Gold prices soared as investors sought safe-haven assets amid fears of a prolonged economic downturn. On the other hand, silver lagged due to initial disruptions in industrial demand, resulting in the ratio reaching historic highs. These periods illustrate how economic crises and shifts in investor sentiment can significantly influence the gold-to-silver ratio.

Correlation Between the Gold-to-Silver Ratio and Market Trends

To better understand the dynamics of the gold-to-silver ratio and its impact on the gold and silver markets, the monthly chart below presents the correlation between the gold-to-silver ratio and these markets. It is observed that the 21st-century bull market in gold and silver is directly related to this ratio. The major peaks in the ratio have corresponded with major bottoms in the gold and silver markets.

For example, when the ratio peaked at 80.65 in 2003, gold and silver bottomed and initiated a strong rally higher. Similarly, the gold-to-silver ratio peaked at 80.06 during the global financial crisis, marking a bottom in the gold and silver markets. The ratio peaked again in 2006 at 83.04, after which gold and silver bottomed and began another price surge, breaking previous records.

The bottom in 2020 differed from others due to the industrial demand for silver. Since the onset of the COVID-19 crisis, industrial demand was lost, causing silver to drop lower than gold, which resulted in a peak in the gold-to-silver ratio. After this drop, both metals initiated a strong price surge.

Interestingly, the short-term chart also strongly correlates this ratio with the gold and silver markets. The ratio’s peak in September 2022 at 90.76 produced a bottom in gold and silver simultaneously. However, it was found that the gold bottom in 2022 developed after a delay from the ratio’s peak. This delay is normal when dealing with short-term charts. On the other hand, the silver bottom occurred precisely at the expected time, which is typical due to silver’s price behaviour. Silver prices tend to reverse quickly once they reach their bottom.

Other peaks in the ratio, such as in March 2023 at 91.06, also initiated a strong price surge in both metals. Moreover, the peak in February 2024 at 91.76 again led to a strong surge in both metals.

Recently, silver has once again produced a bottom at the short-term support level of $26.80 in spot market, but the gold market has not yet produced a lower price during this bottoming process. However, the ratio is currently hitting the resistance line originating from September 2022, and it is attempting to break through this resistance.

It appears that the ratio is at a key level, and a breakout from this resistance would indicate that the correction in both metals is still not over, potentially leading to further price fluctuations. However, if the ratio holds at this resistance and starts to correct lower, it would suggest that gold and silver have bottomed and will increase in value. This scenario would also indicate that silver will move faster than gold, leading to a further drop in the ratio.

Next Move in Gold & Silver

Gold’s performance in recent months has been strong, with the LBMA gold price averaging an unprecedented US$2,338/oz in Q2 2024. This marks a significant increase of 18% compared to Q2 2023 and a 13% increase from Q1 2024. This price surge was notably driven by substantial over-the-counter (OTC) investment, contributing 329 tonnes to the total gold demand. Additionally, central banks continued accumulating gold, supporting the price rally that saw gold hit a new record high.

On the supply side, gold production grew by 4% year-over-year, with mine output reaching a record for Q2 2024, while recycling activities also increased, reflecting the incentive provided by rising gold prices. Despite divergent investment trends across regions—strong in the East and weaker in the West—the recovery in Western ETF flows suggests a potential market rebalancing.

On the other hand, silver is also experiencing a notable increase in demand, mainly driven by its critical role in industrial applications. The global demand for silver is expected to reach approximately 1.2 billion ounces in 2024, fueled by growth in traditional sectors such as jewellery and silverware and modern industrial uses. Silver’s unique properties, including its high electrical and thermal conductivity, make it indispensable in various high-tech and green technologies.

The ongoing expansion of the solar photovoltaic (PV) sector, especially in China, is a significant factor driving silver demand as countries worldwide intensify their efforts to reduce carbon emissions and transition to renewable energy sources. The recent global commitment to lower carbon footprints, solidified during COP28, further emphasizes the importance of silver in future industrial growth, particularly in sectors aimed at achieving net-zero emissions.

From a technical standpoint, gold and Silver markets have recently broken through critical resistance levels, signalling a solid bullish outlook. Gold, having surpassed a long-term resistance level of US$2,075/oz, now sees a potential rise towards US$3,000/oz. Similarly, silver targets an increase to US$50/oz, supported by positive technical indicators and a rising gold-to-silver ratio.

This ratio is currently at a critical level. Both metals could catalyze a solid upward movement if resistance is encountered here. The alignment of technical factors with the ongoing supply and demand dynamics suggests that gold and silver prices will likely continue their upward trajectory soon, with the potential for significant gains as market conditions evolve.

Bottom Line

In conclusion, the Gold to Silver Ratio remains a crucial tool for understanding the dynamics of the precious metals market, particularly during periods of economic uncertainty and market volatility. As gold and silver prices continue to be influenced by a complex interplay of supply, demand, and broader economic factors, the ratio’s behavior provides valuable insights into potential market movements.

With both metals showing strong bullish signals and the ratio currently at a critical juncture, investors should closely monitor these developments as they could signal significant opportunities for gains in the near future. Furthermore, the possibility of rate cuts by the Federal Reserve could further boost gold and silver prices, as lower interest rates typically enhance the appeal of these non-yielding assets. From a technical perspective, with gold targeting $3,000 and silver moving towards $50, the increase in the ratio suggests that both metals are set to surge higher.