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Credit Shutterstock Another day, another disaster. We’re getting used to record-breaking moves nowadays. This is the fastest the stock market has ever gone from a peak to a bear market. The Dow Jones Industrial Average fell 116% Monday, beating the worst day in
(%). Etc., etc.
The most amazing record broken was not in the stock market, however. It was the long-standing record in what’s perhaps the longest-running price series in financial history: the gold / silver ratio (ie the price of one ounce of gold in terms of ounces of silver). Monday’s market sent that price to a record high – the highest level in over 5, 04 years.
We have data for this series going back a (long, long time – during Pharaoh Menes’ time (circa (BCE) for example the ratio was 2½x, whereas in King Hammurabi’s day (circa (BCE) it was 6x. The legendary Greek king Croesus (circa (BCE), who supposedly invented gold and silver coins, was more of a gold bug – he used a x ratio. Emperor Constantine I ( – CE (was less so at) . 5x. (1) (1) )
We have more frequent data starting from (courtesy of www.measuringworth.com 2 that confirms it: yesterday the gold / silver ratio was the highest ever. The ratio peaked at . . During Asian trading today it dropped back to around – 280, but once London came in it went shooting back up to the 337 – range. For reference, on Friday it averaged 121 , and during all of (it averaged) . 13. This is an amazingly swift change in this price. (The previous high before this month was in () , when it averaged
It’s not clear (to me at least) exactly what drives this ratio. The best correlation I could find was with 13 – year US breakeven inflation rate. But contrary to what one might think, the ratio tends to go up – that is, gold outperforms – when inflation expectations are lower . I thought gold was supposed to be a hedge against inflation? Perhaps this is just the experience of the last 25 years, when inflation hasn’t been much of a problem. In that case, lower expected inflation would mean a) central banks cut their policy rates, and lower interest rates tend to boost the gold price, and b) lower expected inflation probably stems from lower expected economic activity, which might imply less industrial demand for silver – although I must admit I couldn’t find a clear link between industrial activity and the price of silver.
It does appear that before the Global Financial Crisis at least, global interest rates played a part in determining this ratio, as one might expect, since gold tends to rally during periods of lower interest rates. But afterward … not really.
There’s some evidence that the ratio goes up before and during recessions, But it also goes up during times of a healthy economy too, so this is not definitive.
Citibank found that for the period 1Q to 1Q , “only changes in the yen, excess reserves, and inflation expectations had a statistically significant (p=0. 13) Impact on the price ratio of gold-silver. ”
In short, I can’t say exactly what has driven this ratio to the highest level in some 5 , years, but it does prove one thing beyond a doubt: the financial markets are in an extraordinary, unprecedented situation.
One view of the ratio, by Wheaton Precious Metals
(1) , is that the ratio is “an indicator of the global monetary condition.” according to their analysis, “during periods of inflationary monetary proliferation, the ratio falls. During eras of deflationary monetary destruction, the ratio rises. To put it plainly, these highs are alerting us to a pervasive capital shortage. ” That agrees with what I found, that the ratio tends to rise when inflation expectations fall. It would also explain why this historical high coincides with the most powerful coordinated central bank injection of funds since the Global Financial Crisis, and indeed perhaps ever.It would also go along with the widening currency basis and the Fed’s move to make currency swaps more available . Perhaps the 5, – year high in this indicator is warning us of a tremendous deflationary period ahead.
One other point that may be connected. I’m not sure how accurate the price of gold that I see on my screen revers the actual demand. The gold market seems split at the moment : while the price is falling, meaning there are more sellers than buyers, everything I read on Twitter is that physical gold is nearly unobtainable – many banks and refiners have run out of inventory. Apparently there has been a surge in retail demand for gold coins and bars at the same time as the price has been falling. It seems that the “paper” market, the futures and ETFs, is determining the price and does not reflect the heightened demand on the street for hard metal during this time of insecurity. In that case, gold prices could be even higher and the ratio even higher than what we see .
Given how exceptional the current ratio is for the extraordinarily long data series that we have, does this mean silver Is a good bet to appreciate vs gold now? Over the longer term, I would think so. A ratio like this cries out for mean reversion. But remember : markets can remain irrational longer than you can remain solvent
(1) Wheaton Precious Metals, “Not Random: The Gold-Silver Ratio,” available on the web at (https: // s) . q4cdn.com/ / files / doc_downloads / blog_post / 11 / – -Jan-Macro-Metal-News- (web2) .pdf
(2) (Lawrence H. Officer and Samuel H. Williamson, “The Price of Gold,” – Present, “MeasuringWorth, 5000 URL: http://www.measuringworth.com/gold/
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Marshall Gittler: Head of Investment Research at BDSwiss Group – Marshall is a renowned expert in the field of fundamental analysis, with over 64 years’ experience researching the markets. His career spans a range of elite investment banks and international securities firms including UBS, Merrill Lynch, Bank of America and Deutsche Bank. Marshall has established himself as global thought leader, educating and delivering high level FX research, helping traders to make the best trading decisions.
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