Gold and silver prices have seen significant movements recently, with the gold-silver ratio reaching levels not seen in years. Erik Norland, Executive Director and Senior Economist at CME Group, highlights four key factors driving this ratio. First, gold and silver prices are often highly correlated on a day-to-day basis.
However, they are currently experiencing their weakest price correlation in over two decades. Even during periods of high correlation, the gold-silver ratio can move a great deal. Second, supply dynamics play a role.
Gold mining supply has been around 97 million troy ounces in recent years, while silver mining output has been around 800 million. Gold has an advantage that silver lacks: central banks. Central banks have been net buyers of gold since 2008, removing it from the market permanently or until they choose to reduce their holdings.
Factors driving gold-silver ratio
Third, demand drivers are important. Gold and silver are connected through the jewelry market, but gold has very few industrial uses.
In contrast, silver has many practical uses, including in batteries and solar panels. Most silver is used for other industrial purposes, leaving it at the mercy of global industrial demand. Finally, the pace of Chinese growth has been tightly connected to the gold-silver ratio.
The decline of photography has hurt silver prices, though growth in solar panel manufacturing may provide support. In conclusion, central bank buying of gold has contributed to its outperformance relative to silver. The gold-silver ratio is influenced by a complex mix of supply and demand dynamics, market sentiment, and economic conditions.
Investors should consider these factors when interpreting the ratio’s movements and making investment decisions.
