The gold – silver ratio reached a high of 87.136 on Wednesday; the highest in 26 years. Having trended upwards since 2016, investors are asking themselves how long it can keep climbing.
The gold - silver ratio is the relative difference between the price of gold and the price of silver, and is simply calculated by dividing the two. In practical terms, Wednesday’s ratio means that for the price of an ounce of gold, you could buy just over 87 ounces of silver, and could be a signal of an imminent price increase for silver.
The chart below shows the silver ratio for the past 30 years, and demonstrates why Wednesday’s figure is so significant.
As represented by the red line on the chart, the last time the silver ratio reached 87 was in September 1993. Since 1970, the average ratio has been 55 - a far-cry from the current heights. Investors and analysts consider a ratio of 80 to be something of a barrier, and the three times the ratio rose above this barrier – as shown by the yellow, green and silver spots – this was followed by the ratio falling back to typical levels.
The ratio climbed above 80 in August 2018, but has since defied historical trends by increasing further, rather than dropping back down. Forecasting the price of any precious metal is difficult, and the gold – silver ratio is no different. As can be seen on the chart above though, there are discernible patterns the ratio traditionally follows, shown by the four pairs of coloured dots.
The orange dots cover the period of 1991 – in which the prices of silver and gold per ounce were £1.98 and £187.25 respectively – up to 1998, when silver jumped up to £4.40 and gold dropped slightly to £181.50. This secular bear market for gold led to the infamous ‘Brown Bottom’ in which the UK’s gold reserves were sold and the price of gold spiked in response.
The yellow dots represent the ratio between 2003 – with a silver price of £2.87, and gold price of £223.52 – up until 2006, when silver jumped to £7.69 and gold rose more modestly to £343.83. Following the Brown Bottom, gold saw its prices climb quickly but, as the commodities boom of the 2000s continued, silver regained ground.
The green dots cover the financial crisis of 2008; as the markets crashed silver stood at £6.71, while gold already benefited from growing investor confidence and had reached £545.77. By April 2011 though, silver reached its record high of £29.26 (almost a 400% increase) while gold was still a few months from its peak, an ounce costing £901.39.
The last time the gold – silver ratio climbed above 80 was in 2016, as shown by the silver dots. In March 2016 silver was £11.05 to gold’s £876.66. When the UK’s Brexit Referendum resulted in a decision to leave the EU, the future economic uncertainty saw both metals jump up in price, but silver enjoyed the greater change. By July 2016 silver had increased almost 50% in value – reaching £15.25 – while gold grew by a little over 20% to £1059.01.
In all of these cases, a high gold – silver ratio eventually resulted in the price of silver increasing significantly, rather than gold crashing. We reported last November that Canadian financial services provider TD Securities is predicting sharp price rises in 2019 for silver. Last October French bankers Société Générale stated their preference to invest in silver, rather than gold, thanks to the current low prices.
With the US economy potentially overheating, and Brexit continuing to loom over the UK, investors are waiting to see what the tipping point will be for the gold – silver ratio.