Gold-Silver Ratio Could Indicate the Early Stages of a Silver Breakout

By Mike Maharrey, Money Metals Exchange

Two months ago, the gold-silver ratio broke an important support level, indicating the white metal could be in the early stages of closing its gap with gold.

The gold-silver ratio indicates how many ounces of silver it takes to buy one ounce of gold given the spot price of both metals. In other words, it tells you the price of gold in ounces of silver.

The current gold-silver ratio is hovering just about 76-1. That means it takes 76 ounces of silver to buy one ounce of gold.

The ratio remains historically high, meaning that silver is underpriced compared to gold, but there is some indication the trend is in the early stages of reversing.

In the modern era, the gold-silver ratio has averaged between 40-1 and 60-1. When the gold-silver ratio gets far above the high end of that historical average, it tends to return to the mean with a vengeance. 

For instance, in 2020, the gold-silver ratio set a record of 123-1 as Covid hysteria gripped the world and then plunged to around 60-1 as central banks around the world cranked up the money creation machine to cope with governments shutting down economies. 

In another example of this snap-back, the gold-silver ratio fell to 30-1 in 2011 after rising to over 80-1 during the money creation of the Great Recession in the wake of the 2008 financial crisis. 

Three months ago, the gold-silver ratio climbed as high as 87-1. Two months ago, the ratio fell to around 73-1, below the 13-year support level. It briefly rallied, climbing back to 80-1, but it failed to regain 13-year support before dipping over the last five days to the current level.

Given that the scenario still looks bullish for gold with the likelihood of a rate hike this fall increasing, silver could be set up for a significant bull run.

Keep in mind that silver historically outperforms gold in a gold bull market. For instance, gold charted a gain of around 40 percent during the pandemic. Meanwhile, silver was up a whopping 141 percent!

The recent breakdown of the support level in the gold-silver ratio takes on more significance given the fundamentals. Demand for the metal is at record levels while supply has flatlined.

Silver demand is expected to hit 1.2 billion ounces this year. That would rank as the second-highest annual silver demand on record. Given the supply outlook, this level of demand would create a structural market deficit of 176 million ounces. That would be the fourth consecutive year of demand outstripping supply, cutting further into global silver reserves.

The structural deficit in 2023 came in at 184.3 million ounces.

Demand will likely increase in the years ahead due to the solar energy market. Not only is the demand for silver panels growing, but the amount of silver used in each panel is also increasing.

According to a research paper by scientists at the University of New South Wales, solar manufacturers will likely require over 20 percent of the current annual silver supply by 2027. By 2050, solar panel production will use approximately 85–98 percent of the current global silver reserves.

Given both the supply and demand fundamentals and the technical breakdown in the gold-silver ratio, this may be an outstanding time to buy silver in the early stages of a bull run.