It’s been quite the trade in precious metals over the last six months especially. You would think that we’ll be meeting a cooling point soon but even until today, things continue to run hot for both gold and silver. But if you’ve been watching things closely, or even loosely for that matter, you’ll surely notice that silver has been in much more scintillating form as compared to gold.
Since the end of July last year, silver has gained by over 145% until now. As for gold, it has posted gains of “only” just over 40% since that same time period.
Now, the fundamental factors driving the rally in both precious metals do share some similarities. That being the case of geopolitical uncertainty and currency debasement fears, well mostly the latter I would say. And silver is typically by extension the more “volatile” or “risky” little brother to gold. One can think of it as the supposed “poor man’s gold”.
But amid a structural supply deficit, it has basically sent things into overdrive and just about time. It’s been five straight years already that silver is facing a supply deficit, with demand consistently outstripping mine production. So, that’s one key factor driving the surge as we continue the AI and green transition globally.
In turn, that is now seeing a massive narrowing in the gold-to-silver ratio – which is on approach to the 50.0 mark. That’s the lowest point since 2013.
When it comes to gold and silver, there are very few established trading axioms in general. You can point to your fundamentals, technicals, and seasonal factors. But outside of that, there’s not too much else.
The gold-to-silver ratio though is one that some traders and investors do look at and it is starting to present a very interesting situation to start the year.
Most would point to the 80/60 rule when it comes to the ratio, as noted above. However, there are some that would argue that the rule is closer towards 80/50. And if you want to go by the former, we’re sitting quite close by to the point where the narrative of the story suggests that “silver is overvalued” or “gold is undervalued”.
The point to be made here is not that market players are undervaluing gold, not by the littlest bit. As mentioned above, gold itself has also risen by over 40% in the last six months or so. And for any asset class, that’s an incredible run on its own merit.
The thing to be mindful of here is that when something moves in a straight line too quickly, the pullbacks can be just as violent. Something, something Icarus flying too close to the sun.
So while the silver rally is quite something to behold in starting the new year and moving above $90 today, just be mindful that the pace of the rally is starting to challenge some trading axioms and comfort boundaries.
In that lieu, any retracements in precious metals look likely to punish silver much more than it would gold. That is if you are to go by the mean reversion theory tied to the gold-to-silver ratio.
From a fundamental standpoint, the stars are continuing to stay aligned for gold and silver to stay hot over the medium-term. But as always with consensus trades, there’s a certain element of danger when it comes to too one-sided positioning. And that is the pullbacks, whenever and however they come, can be sharp and violent.
The 9% dip on 29 December already offered a bit of a fair warning
