gs1-300x159 Is the Gold/Silver Ratio Resetting to a New Normal?

Gold’s rally since its August 2018 low has been impressive to say the least.

Gold has broken above $1,350/ounce in February of this year and it looks like gold’s price is about to exceed that level once again.

 

Some experts, like billionaire investor Paul Tudor Jones, estimate that gold can reach up to $1,700 an ounce within the next year or two.

 

Unfortunately, the same can’t be said for silver.

gs2-300x159 Is the Gold/Silver Ratio Resetting to a New Normal?

Silver reached a high of $16.25 an ounce last March, but now it is barely scraping above $15.00 an ounce.

 

Interestingly, the gold/silver ratio has not narrowed as some precious metals investors might have expected. Instead, perhaps shockingly, it has continued to rise, widening to a level above 90:1.


gs3-300x128 Is the Gold/Silver Ratio Resetting to a New Normal?

This means that 1 ounce of gold is worth 90 ounces of silver.

 

With some experts expecting the gold/silver ratio to fall back to its 20th century historical average of 47:1, or perhaps it original fixed price ratio of 15:1,

 

But recent price trends have made some hopeful investors skeptical about the averages, thinking that perhaps a “new normal” average is being reset.

 

Gold/Silver Ratio Near Term Forecast

The ratio seems overextended and due for a correction. Such a correction will likely come in the form of a surge in silver prices.

 

In fact, the last time it had reached such a high level was in October of 2008, when the ratio topped out above 89:1. But the issue with this overextension is that there’s no technical or fundamental indication that the gold-to-silver trend is weakening.

 

Gold/Silver Ratio Longer-Term Forecast

Despite waning silver production, the slowdown in global economic and industrial activity is not favorable to silver. Remember that silver, much more so than gold, plays a dual role as a precious metal and an industrial metal.

 

Silver benefits most during a period of rising inflation with active global industrial activity. For example, silver soared during times of global military conflict, as what had happened in World War I and II.

 

Silver may be a safe haven, but when global industrial activity declines, so too does its demand. We saw this happen during the Great Depression, when gold held up, the gold/silver ratio rising as high as 100:1.

 

Currently, the US stock market and economy are soaring. There are no immediate signs of recession. But fears of a looming slowdown are growing, as in the case of the Morgan Stanley Business Conditions Index, which collapsed in just one month from 45 to 13.

 

With fears of a global slowdown increasing and the prospects of healthy industrial activity dimming, such conditions are not favorable to silver demand.

 

But after a recession, when interest rates are low, and when global economic activity begins to pick up, that’s when silver and other industrial base metals will begin to rise.

 

Re-evaluating the Gold/Silver Ratio

If you were to look at silver’s price in relation to gold over the course of the last 150 years, you may notice that aside from a few price spikes, silver’s long term trend shows a steady decline in relation to the yellow metal.

 

The question is whether something so monumentally significant can happen as to cause a reversal in this 150-year trend.

 

From this viewpoint, it seems almost inconceivable that the gold/silver ratio will ever get back down to its original level of 15:1.

 

But is it still realistic that the ratio can even get back down to the 100-year average of 47:1?

 

Or is it more realistic to say that the gold/silver ratio will be fluctuating between 50:1 and 100:1 with an average of 75:1?

 

The gold/silver ratio has been a useful model to anticipate the cyclical movements in gold and silver. But this spread has been based on fundamental conditions surrounding supply and demand.

 

If those conditions have been undergoing fundamental changes, however slowly, it might be time to adapt to the environment.

 

The risk of loss in the trading of stocks, options, futures, forex, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and FX involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.