Over the past period, the price of silver has consistently outperformed that of gold.
Now is the time to go long on the gold-to-silver ratio!
On May 11, 2023, non-ferrous metals represented by silver and copper fell again, while gold only slightly declined or even turned positive, reversing the recent situation where silver has been weaker than gold.
Historically, the prices of silver and gold generally tend to converge, both serving as hedges against inflation, but gold's safe-haven characteristic is far stronger than that of silver. Silver's industrial attribute is much stronger than gold's, and silver's elasticity is higher than gold's, so the gold-to-silver ratio has always fluctuated within a certain range. Now, it might be time to go long on the gold-to-silver ratio again.
Looking ahead, the U.S. economic recession is approaching, global demand is generally declining, industrial demand is falling, and demand for non-ferrous metals has noticeably decreased. However, after the recession, the demand for safe-haven assets rises, and there is also the expectation of interest rate cuts. The dual attributes of being a safe haven and resisting inflation will make gold more likely to rise.
Therefore, for a period in the future, gold may significantly outperform silver.
Historically speaking, the current absolute value of the gold-to-silver ratio is not particularly low; it is roughly in the middle. The gold-to-silver ratio is currently around 80. If investors were to look solely at the chart below, many might think that going short would be more appropriate. However, the dynamics between gold and silver have actually changed.
Since 1971, the gold-to-silver ratio has been on the rise, increasing from around 20 to about 100. For about 30 years after 1986, the gold-to-silver ratio fluctuated around 60. But since hitting a bottom in 2010, the ratio has been consistently climbing. Overall, the gold-to-silver ratio has shown an upward trend.
Looking at future trends, with inflation and high interest rates prevalent globally, the downward trend in global demand is very clear. The current market debate revolves around how much demand will decrease, not whether it will decrease. I am somewhat more pessimistic about this because the total amount of global debt accumulated over the past period has been substantial, which is also the reason why inflation has been slow to decrease.Against the backdrop of high debt levels, there are two general approaches: either to cut spending and reduce demand, or to print money. Typically, these two strategies are pursued in parallel because excessive spending cuts can lead to a hard economic landing, while excessive money printing can result in uncontrollable inflation.
With the current unemployment rate in the United States still at a historical low, the decline in demand is only just beginning. Recent economic data from various countries have already reflected the weakening demand, and silver, being the most commodity-driven with a high degree of elasticity, will follow the market into a downturn.
Once the economy starts to decline and panic sets in, the safe-haven attribute of gold will become prominent. To address the economic downturn, Western countries will inevitably lower interest rates again, which will be favorable for the rise in gold prices. Of course, during the rate cuts, it is also beneficial for silver prices to rise.
Many investors may wonder, why not directly short silver or go long on gold, instead of choosing the gold-silver ratio?
This is because there is a risk that needs to be hedged. Although the decline in overall demand is quite certain, the Federal Reserve's policy response is uncertain.
If the global economic downturn exceeds expectations, the price of gold may also show a decline. Although the demand for gold as a safe haven may decrease, pessimistic economic expectations can also lead to a decline in the demand for gold jewelry and industrial uses. At that time, when everything is affected, gold bulls also face risks.
If, during the economic downturn, the Federal Reserve implements a massive easing policy ahead of schedule, silver may also rebound quickly, so shorting silver also carries risks.
Going long on the gold-silver ratio can effectively mitigate risks in extreme situations. Even if the economy declines more than expected, silver's decline will exceed that of gold. And if monetary policy is excessively loose beyond expectations, gold's inflation-resistant properties are not inferior to silver's. At the same time, due to the weak economy itself and relatively weak demand, silver may be weaker.
Therefore, going long on the gold-silver ratio at this time may be a safer strategy.
For investors, certainty is the most important. If one wants to avoid risks, grasp certainty, and preserve capital, these are the issues that need to be considered. Being right or guessing correctly is not very difficult; what is more challenging is how to avoid risks when one is wrong and how to amplify gains when one is right.
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