Gold-Silver Ratio Trading at 25-year highs

•          Gold/Silver ratio at 25 year high
•          US led trade wars weighing on silver and at the same time creating uncertainty, which is +ve for Gold
•          Industrial use for Silver: 60% of annual demand
•          Industrial use for Gold: 10% of annual demand
•          Gold trading at 6-yr high

Gold to Silver Ratio: 5 years

Current Ratio:       92.04

5 Year High:          92.60

5 Year Low:           62.36     

5 Year Change:     +28.93 (+45.84%)

(as at 28/06/19)

Why the Move?

The recent breakout in the Gold/Silver ratio means it’s now sitting above 90 - an over 25-year high.

With the Federal Reserve indicating a reversal in their tightening cycle in June, coupled with Mario Draghi emphatically trumpeting “whatever it takes” (all over again), global growth again takes centre stage as the US-China trade wars/negotiations continue. Obvious pressure points are being observed in all G10 interest rate curves, as 2-10-year rates invert implying a recession is nigh.

Gold has reacted as one would expect. US rate policy will likely weaken the dollar and alleviate liquidity concerns, all factors favourable towards the metal known for its risk hedge qualities. Which brings us to the ratio. Silver isn’t a risk hedge; it is and will remain an extremely important industrial metal which exhibits high volatility at points in history. The true store of value remains gold in the asset class and as such the ratio has climbed steadily to the lofty highs of 92.00.

We have to go all the way back to 1991 (1st Gulf War) to see a greater outperformance (high of 100.28). This time it is both the risk of conflict and the corporate balance sheet driving the current move.

Normalised as of 01/01/1999

Outlook – is there actually a correlation?

There are some that question whether the recent move actually has any application in today’s market.

“The gold:silver ratio no longer has much relevance. With gold prices running hard, we have received many questions as to what this means for silver. In our view, while gold continues to receive ‘annuity’ demand from macro asset allocation trends, silver does not, and until this changes we may be looking at a growing disparity over time” – Colin Hamilton, Managing Director of Commodities Research at BMO.

From Arion's perspective the recent widening of the Gold:Silver ratio is about funding, liquidity and global growth. For the price to narrow, we would need to see a stronger dollar and synchronised global growth with tighter USD liquidity (i.e. higher rates)...make of that what you will.