The gold-to-silver ratio remains a pivotal metric in the precious metals market. Despite gold’s superior performance over silver, one analyst predicts that this ratio is unlikely to diminish soon. This is due to gold’s continuing strong upward trend.
Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence, highlights that historical trends and current economic indicators suggest the ratio will remain high. “Gold has a longstanding tradition of outperforming silver, a trend noted since Adam Smith’s time,” McGlone remarked. “With rising US unemployment and declining government bond yields in both China and the US, the gold/silver ratio is projected to approach 100.”
McGlone also points to anticipated increases in market volatility as a potential driver for gold’s continued dominance over silver. He notes that gold’s performance typically strengthens when the yield curve inversion, which has been historically prolonged, begins to normalize.
“Looking at past trends, such as the volatility lows of 2006 when the gold/silver ratio hit a low of 45, we see similar conditions today with the ratio at approximately 86 as of August 30,” McGlone said. “The ratio may accelerate its upward trajectory due to shifts in volatility and interest rates.”
Additionally, McGlone observed that the current 52-week average of the Cboe Volatility Index (VIX) minus the three-month T-bill rate is below levels that previously marked significant rises in the gold/silver ratio, such as those seen in 2018 and leading up to 2020.
However, McGlone cautions that the current period of low volatility might not last long, given increasing global tensions and signs of a potential US recession. “Silver’s role in technology and its connection to fossil fuel replacements contrast with central banks’ current preference for gold,” he said.
The inversion of the yield curve, now the longest in history, may be a signal that the gold/silver ratio could move towards 100. McGlone suggests that resistance levels around 76 might be turning into support as the yield curve starts to reverse.
“The recent wide inversion of 156 basis points in July 2023 could represent a low point for the spread,” McGlone added. “Historically, gold tends to perform better than silver as the yield curve normalizes, and with rising unemployment, we believe it’s still early days for this trend.”
McGlone attributes these market dynamics to shifts in sentiment and central bank buying patterns. “The US sentiment pendulum has swung between recession fears and optimism, and central banks are currently favoring gold over silver,” he said.
Furthermore, McGlone highlights that the unemployment rate’s historical behavior suggests gold will likely continue outperforming silver. “Given that the unemployment rate has rarely bottomed below 3.4% without eventually exceeding 6%, and the close correlation between this rate and the gold/silver ratio, gold’s advantage is expected to persist.”
He also noted that the ratio’s recent dip to 73 ounces of silver per ounce of gold in May could have established a support level, with the ratio currently at 86. “As the ratio moves towards 100, the unemployment rate’s impact remains a key factor for the second half of the year,” McGlone concluded. “With the consumer price index falling below rising unemployment for the first time since 1982, the outlook for gold relative to silver appears strong.”
