LAWRIE WILLIAMS: Gold:Silver ratio needs big gold bull market to bring it down

The gold:silver ratio (GSR), much followed mainly by silver investors convinced that one day it will come down to its reputed historical level of 16:1, remains languishing in the high 70s.  Personally I doubt whether we will ever see the 16:1 level again – certainly not in my lifetime (but I am getting old!)  Apart from the very brief silver price spike when the Hunt Brothers tried to corner the silver market (and almost succeeded before being brought down and bankrupted) the GSR has moved since then in the range of 31.5 (a very shortlived spike downwards coinciding with the brief silver price peak in April 2011) and close to 100.  As I write it is standing at 77.6.

Silver, sometimes known in the trade as ‘the devil’s metal’ is renowned for its price volatility. The fact is, that in most views, it can no longer be really considered a monetary metal per se.  There is, though, still a substantial trade in officially issued silver coins which does, I suppose, give it some kind of monetary credibility although the sale value thereof tends to be substantially higher than any face value that may be put on them.  They are minted very much for the investment market.  But overall principal global demand for silver is industrial so the price movement relationship with gold is not necessarily a logical one – but it is ongoing nonetheless.

This relationship can be highly volatile.  When the gold price gains, silver tends to gain even more (in percentage terms).  It has been referred to as ‘gold on steroids’.  Similarly though when gold falls silver tends to drop faster and its current price level of under $14 an ounce has very much reflected the decline in the gold price over the past three years, with silver falling much further from its peak than gold.

For the GSR to fall substantially, therefore, there needs to be a strong upwards movement in the gold price, to drag silver up with it and then see silver surpass it percentage-wise as sentiment picks up.  Silver investors tend to be hugely optimistic, and active, in their support of their favoured metal.  But even so, the GSR has a huge way to go to get anywhere back to near say even the 50 level.  For it to achieve this one feels there would have to be a mega-bull market in gold – perhaps up to the oft-touted $5,000 level, and then silver might really fly.  But consider – say gold does recover strongly over the next few years to match, or surpass, its 2012 high and reach perhaps $2,000 (a rise of 85% from its current levels – not impossible but perhaps not realistic without a global economic collapse, or other major geopolitical catastrophe) and if the GSR falls to 50 (which is about the best level this observer might foresee), then that would mean a silver prices of $40 an ounce – a rise of 185% - still well below its 2011 peak.

So silver did reach just short of $50 an ounce back in April 2011, with the GSR coming down to 31.5, but too many investors had their fingers burnt when the price subsequently plunged and this is such a short time ago that the same then silver-interested investors may be far more cautious should the metal start to surge again.  The previous mega peak in silver and subsequent dive back to more realistic levels had been 30 years earlier – time for a new generation with no memory of that even more severe collapse in price to be ruling the markets for the 2011 spike.  Global demand may well be exceeding supply, but there are massive stocks out there which can be mobilised either to keep the price down, or just to take profits.  Either way it’s difficult to see silver rising on its own account and thus it needs the gold surge to launch it to higher levels.

Silver does also appear to be such a manipulated market, that one could say anything is possible pricewise depending on the investment strategies of the metal’s huge principal holders who also seem to dominate the all-important futures market. Bur realistically a significant surge in the silver price is very much dependent on a sharp gold price increase, and if the latter happens then the GSR may start to come down.  But if this should start to occur we suspect prices would move relatively slowly as both gold and silver will likely take time to regain some of their past momentum.

But, back to the title of this piece.  As we've noted above, the GSR will not drop at all without an improvement in the gold price first, and will not drop significantly unless gold really begins to take off.  If the latter happens then silver could fly and the GSR fall accordingly, but don’t expect to see it much below 50 unless the global economy truly tanks.  Silver investors, be careful what you wish for.

13 Jan 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com