Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Consolidation in Precious Metals – Range-bound Gold-Silver Ratio

Commodities / Gold and Silver 2011 Jan 06, 2011 - 06:30 AM GMT

By: Mike_Stall


Best Financial Markets Analysis ArticleHaving dwelt a lot on the topic of the gold:silver ratio from a technical and quantitative standpoint in our earlier essays, it is about time we examined the ratio fundamentally. In the strictest sense of mean reversion, the ratio between gold and silver should follow a straight line over time. However, as observed in the previous article, the ratio not only has a wide range but also fluctuates between extremes. This means that the prices of gold and silver are perceived differently in different market conditions and a concept of mean reversion is not enough to interpret the gold:silver ratio.

In fact, the ratio reflects economic and political factors governing the markets fairly well. A study of the ratio, therefore, has to be a combination of the quantitative approach and a fundamental approach. In this essay we will travel through history and see how sensitive the ratio has been to external factors outside of pure supply and demand picture. We will also examine current fundamentals in the light of factors found to be instrumental in determining prices (and hence the ratio) in the past.

Historical Fluctuations in the Gold:Silver Ratio

Breaking down the ratio in the last ten years into distinct regimes, we can observe how fundamentals play a part in shaping regimes. The first regime is that of a steady outperformance of gold over silver from the start of 2000 to the middle of 2003. This despite gold reaching a 21 year low of about USD 250 per ounce in 2001!

From 1998 to about 2003, starting with the Asian and the Hedge Fund crises, the economic downturn of 2000, through the Y2K jolt and the Iraq war, investments poured into gold more than silver. As observed in any period of crisis, gold was deemed an important crisis commodity. As fear gripped the commodity markets, gold increased in value relative to silver – the gold-silver ratio increased from 40 in 1998 to close to 80 in 2003.

The rallies in gold in this era were a result of a combination of factors. China deregulated gold markets in the early 2000s that increased demand significantly. Additionally, the dotcom crash and the 9/11 terror attacks encouraged investments in this safe haven. Introduction of the euro also devalued the U.S. dollar in the international market helping gold more than silver perhaps.

The period from the middle of 2003 to the first quarter of 2004 witnessed a widespread correction in the ratio, with a pullback in gold prices and strengthening of silver. The equity market started to rally reflecting the end of a crisis period, as 9/11 drifted further back in the minds of investors - silver prices once again increased relative to gold. This is one of the many instances in history where a period of crisis is followed by more investments flowing into silver, leading to corrections in the gold:silver ratio.

From first quarter of 2004 to the end of 2005, the ratio bounced back and stabilized at a higher level. The year 2006 perhaps witnessed the most volatile fluctuations, with the ratio first going down, then recovering before going down again. The first half of the year saw widespread dumping of dollars. Italy dumped billions of dollars from its reserves and replaced it with the pound sterling. Russia and a number of smaller European nations also slashed dollar reserves considerably, creating uncertainties in the dollar market and making gold volatile.

After the volatile year for gold in 2006, gold witnessed a steady upsurge (in comparison with silver) in 2007. Oil producers in the Middle East announced major gold bullion purchases; China announced plans to increase gold bullion purchases with its excess cash reserves; Vietnam also opened its first gold exchange. A combination of these factors saw gold demand outpacing supply for the most part of the year, propelling prices north.

In 2008, the ratio corrected marginally from the 2007 highs. Not because gold demand was waning – in fact gold demand continued to surge on the inkling of a financial crisis in the upcoming months. However, the ratio corrected because silver started to outperform gold for once at the onset of what would be a deep global recession. The primary reason for silver’s strong performance was a surge in investment demand of silver, both in the United States and Europe (where the impact of the recession was the biggest).

During the height of the recent economic crisis in late 2008, the gold:silver ratio peaked to its highest level in four years at 84.4. Just three months prior to this peak, the ratio was hovering around the 50 mark, the average for the early half of the decade. At this stage, the ratio reflected significantly overbought gold, as its safe haven properties pressed the yellow metal to outshine its industrious counterpart. A natural equilibrium began to re-emerge during 2009. The strong correlation between gold and silver helped silver to gain in tune with gains in gold. Despite corrections in the ratio in the first half of 2009, the ratio still appears to be at relatively high levels compared to historical averages. 

In the first three quarters of 2010, gold started to rise again over silver, emphasizing its evergreen investment characteristic. This time gold demand surged as a hedge against inflation – anticipated because of the monetary stimulus packages that had been implemented during the recession. The recessionary concerns had started to ease during this period, but uncertainty still loomed large about the nature of recovery. Silver could not gain from rebounding industrial activity because of this uncertainty. Large buying activities from China and India also held gold in good stead during this period.

In the rear half of 2010, we started observing sharp corrections in the ratio. Apparently, silver has started getting its due. The rebound in industrial activities has rubbed off on silver prices, while the gold markets have started to exhibit signs of short-term sluggishness. So where does the ratio move from here? Will 2011 be a sluggish year for gold while silver rides on the recovery wave to outperform gold? Or has the silver rally lost steam already?

While there is no questioning the long-term fundamentals of precious metals, especially gold, 2011 could be sluggish as gold may not be able to sustain its current pace of growth, say some in the industry. Read our articles The Economy is Still on Shaky Foundation and Gold's Gleam Will Not Fade Away Because of the Current Decline to comprehend the strength in gold fundamentals in the long term.

Silver's fundamentals are improving. With a majority of silver demand coming from industrial applications, and rising stock market (at least that is the case at the moment of writing this essay) so will demand, thus pushing silver prices higher. The big question is whether this recovery is already factored in the price and the recent rally in silver is over and done with for the medium-term.

Gold-Silver Ratio to Stabilize in the Medium-Term

Historically, it has been observed (we have dwelt on this in the first section of this essay) that gold exceptionally outperforms silver in any downturn. In case the downturn impacts industry, silver lags due to damp industrial demand, amplifying gold’s performance. Other occasions such as the dot com crash (where silver’s industrial demand remains unaffected) will also possibly witness gold outperforming silver, but less significantly as silver also meets requirements of a safe haven. Let’s face it - at least now Investors believe that silver cannot beat gold in the safety that the latter provides. The dependence on industry adds further volatility to silver, unlike gold’s almost unidirectional move.

Generally, after a crisis, silver tends to catch up with gold, bringing the ratio down again. The pent up momentum in silver caused by gold’s wide upward fluctuation during the era of crisis takes effect now and silver tends to outperform gold. The economic crisis of 2008 was perhaps an exception to the rule.

Although signs of a recovery were apparent in early 2010, silver did not rebound immediately. Monetary stimulus, followed by possibility of inflation again drove gold to the fore.  Silver has begun to claw back and catch up with gold only in the past few months on the back of industry and momentum. And the momentum in silver prices has been quite dramatic!

As the global economy recovers and markets begin to even out, risk appetite will return. As the need for a safe-haven recedes, investments will begin to move away from gold into higher volatility (higher return) securities. This means that a lot of investments will move away from gold into silver in the precious metals space as well (silver is always a higher beta metal). 

If we learn our lessons from history, the fluctuations in silver prices should have legs for some more time because it has only started to emulate what gold did during the recession. However, the ratio has plunged quite sharply in the rear end of 2010 and is almost at ten year low levels. When held in the perspective of a typical rebound in silver post economic recovery, the current retracement of the ratio appears close to historical retracements. So, from a historical standpoint, silver’s move might be complete and going forward, the ratio will stabilize for a bit before gold starts edging up again. This could be caused by a consolidation on the general stock market.

Fundamentally too, indications are of a range-bound ratio in 2011. The bull run in gold is already showing signs of fatigue. In 2011, gold is expected to gain at a slower pace supported by investment demand. Investors should remain cautious and wait for appropriate signals before another leg of the bull run resumes. Silver too will remain subdued, but at these elevated levels with good support from industrial and investment demand. As both legs of the ratio gain steadily, the ratio will remain largely range-bound, which could make pair-trading particularly profitable. Long-term predictions of the ratio are anybody’s guess, however one might expect the ratio to move below the 20 level, as it was the case at the end of the previous bull market at the beginning of 80's. As seen historically, the ratio is sensitive to market conditions and will generally fluctuate between peaks and troughs. Individual legs, gold and silver, will continue to gain though in the long-term (despite minor fluctuations in the medium-term).

To keep yourself informed about the nitty gritties of the precious metals market, I recommend you to sign up for our free mailing list. Sign up today and you'll also get free, 7-day access to the Premium Sections on the website, including valuable tools and charts dedicated to serious PM Investors and Speculators. Again, it's free and you may unsubscribe at any time.

Thank you for reading.

Mike Stall
Sunshine Profits Contributing Author
Sunshine Profits

Mike Stall is a writer on He is a commodity analyst in the precious and industrial metals space with a background in quantitative analysis of the financial markets. Mike Stall has been actively associated with studying gold, silver and base metal prices from both a quantitative as well as a fundamental standpoint. Mike Stall believes that commodities are superior investment instruments in comparison with most other asset classes as they tend to perform better in environments of inflation, fluctuating currencies and uncertain equity markets.According to him, the inherent and intrinsic value of a commodity often leads to safer and stronger returns that have been historically proven, fundamentally as well as quantitatively.

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in