The gold-silver ratio indicates how many ounces of silver are needed to purchase one ounce of gold based on their spot prices. This ratio is historically high right now, suggesting that silver is undervalued compared to gold. However, there are early signs that this trend might be reversing. Given the current supply and demand fundamentals and the technical breakdown of the gold-silver ratio, it might be an excellent time to invest in silver as it seems to be entering the early stages of a bull run.
Two months ago, the gold-silver ratio broke a significant support level, suggesting that silver might start closing its price gap with gold.
The gold-silver ratio measures the amount of silver needed to buy one ounce of gold at current spot prices. The ratio is currently around 76:1, meaning it takes 76 ounces of silver to purchase one ounce of gold.
Historically, this ratio is high, indicating that silver is undervalued compared to gold. However, there are signs that this trend might be reversing. The gold-silver ratio has typically averaged between 40:1 and 60:1 in recent times. When it rises significantly above this range, it tends to return to the mean forcefully. For example, during the COVID-19 pandemic in 2020, the ratio reached a record high of 123:1 before dropping to around 60:1 as central banks increased money supply. Similarly, the ratio fell to 30:1 in 2011 after rising above 80:1 during the 2008 financial crisis.
Three months ago, the gold-silver ratio reached 87:1 before falling to around 73:1, breaking a 13-year support level. It briefly rallied to 80:1 but failed to regain the support level before dropping again to its current level.
With a positive outlook for gold and potential rate hikes this fall, silver could be set for a significant bull run. Historically, silver outperforms gold during gold bull markets. For example, during the pandemic, gold gained around 40%, while silver surged by 141%.
The recent breakdown of the gold-silver ratio's support level is significant given the current fundamentals. Silver demand is at record levels while supply has stagnated. This year, silver demand is expected to reach 1.2 billion ounces, the second-highest annual demand on record. This demand level would create a structural market deficit of 176 million ounces, marking the fourth consecutive year of demand outstripping supply and further depleting global silver reserves.
In 2023, the structural deficit was 184.3 million ounces. Future demand is likely to increase due to the growing solar energy market. Not only is the demand for silver in solar panels rising, but the amount of silver used in each panel is also increasing. Research from the University of New South Wales suggests that by 2027, solar manufacturers will require over 20% of the current annual silver supply, and by 2050, solar panel production could use 85-98% of current global silver reserves.
Considering these supply and demand fundamentals and the technical breakdown in the gold-silver ratio, now could be an outstanding time to buy silver as it enters the early stages of a bull run.
